Citi and Bank of America "Encouraged" to Get More Capital as Result of Stress Tests

[girl gone mad]

Citi and Bank of America "Encouraged" to Get More Capital as Result of Stress Tests
http://www.nakedcapitalism.com/2009/04/citi-and-bank-of-america-e.html">Naked Capitalism

Ah, in Lake Woebegone, all the women are beautiful and all the children are above average. And in the stress tests, no one fails, they just need to get more equity, preferably not from Uncle Sam, but he is always there to help his best bankster buddies.

Recall many observers, including yours truly, deemed the Team Obama stress tests to be more than a tad permissive. Their supposed downside scenario is coming to look more and more like a middle of the road outcome. Moreover, the banks ran the tests themselves (!) using their own pricing and risk models, and the focus was on loans, when many types of structured credits are more sensitive to increasing default rates.

But even with these industry-coddling approaches, Citi and BofA, both of which have large securities operations, appear to be coming up a tad short. This is either a sign that they are in as bad shape as we suspected (ie, even with the lax stress tests they didn't look too hot) or the criticism of the tests made the powers that be realize that giving the big banks a pass, particularly if they were to get in trouble not too far down the road (as in the next year) would completely undermine the Treasury's credibility. Treasury said that the interpretation of the results would be more stringent in light of worsening economic conditions, so perhaps they did recalibrate their grades.

From the Wall Street Journal:

Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital based on early results of the government's so-called stress tests of lenders, according to people familiar with the situation.

The capital shortfall amounts to billions of dollars at Bank of America, based in Charlotte, N.C., people familiar with the bank said.

Executives at both banks are objecting to the preliminary findings....The two banks are planning to respond with detailed rebuttals, these people said, with Bank of America's appeal expected by Tuesday.

Yves here. I grew up when regulators were feared. This idea that you can negotiate with them is perverse, particularly when these tests went on for weeks. Back to the story...

http://www.nakedcapitalism.com/2009/04/citi-and-bank-of-america-e.html">More...

[aquart]

1. What does that mean? Find a buyer?

Defenestrate? Up the bonuses?

[HamdenRice]

4. It means sell common stock

That's the primary meaning of "raise equity". The common stock could be sold to one or two big investors (which would be like "finding a buyer") or it could be sold to the public.

Unfortunately, it's stock price is very low and the demand for its stock is weak, so an offering to the public might not be very successful. On the other hand, because the price is so low, the chances of doubling, tripling, quadrupling your money is much higher. (In other words, when a $1 stock reports earnings worth $1 in stock price, the stock doubles or goes up 100%; when a $50 stock reports earnings worth $1 in stock price, the stock goes up 2%.) I know a retired rich guy who doubled his money in one day on Citi stock because it's so low and small earnings gains cause large percentage price swings, and he's not even serious as an investor. He described it as goofing around with a few thousand dollars.

Another way to raise equity would be to sell assets, but again, in this environment, that's not easy.

[Bigmack]

5. Of course it means

"up the bonuses," because then those fat cats will just re-deposit the bonus $ in their bank accounts, and then the banks will have MORE capital....won't they? Ms Bigmack

[TacticalPeek]

2. So it was a pass or fail or negotiate with your good buddies test?

Those are easy.

[pa28]

3. The Charlie Rose round table you posted earlier ties in with this.

More "AIG's" to come they seemed to think. Also, they politely pointed out that citi would among the worst in stress test results.

I think it's clear now that the administration will try to avoid nationalization or receivership at any cost and the cost of propping up will grow ever higher. By the IMF calculations we're talking another two trillion at least of under capitalization which you and me will have to pay through taxation, inflation and of course with interest. (2,000,000,000,000.00 in case anyone is counting zeroes)

This is optimistic as well because the stress test seems to be talking about numbers that assume recovery today or at least very soon along the curve.