As details of the findings of the “stress tests”, the analyses that the Treasury Department is making of the big banks, leak out, I’m finding them increasingly stress-producing. Here are takes from the New York Times:
The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank.
If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.
It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.
But that would make the government one of the bank’s largest shareholders.
Wall Street Journal (subscription):
Regulators have told Bank of America Corp. that the company needs to take steps to address a roughly $34 billion capital shortfall based on results of the government’s stress tests, according to people familiar with the situation.
The exact amount of the needed infusion couldn’t be determined late Tuesday, and Bank of America officials either declined to comment or couldn’t be reached.
Regulators began notifying the 19 financial companies subjected to the government tests of the results Tuesday.
An official announcement is expected after the close of U.S. stock-market trading Thursday.
and the Financial Times:
US regulators are moving to impose tough conditions on banks that want to repay federal bail-out funds, requiring them to prove that they can issue debt without government insurance.
This new requirement, which was confirmed by a senior US official, could deter some banks from trying to repay funds early. Banks have issued more than $300bn of debt insured by the Federal Deposit Insurance Corporation. Earlier, a second senior US official told the Financial Times that banks wishing to repay government funds may also be required to demonstrate that they can raise equity capital from private investors.
The new debt-raising condition will be part of a framework for repayment that could be published as early as Wednesday before the release of bank stress test results on Thursday.
If you find that too much you might want to look at the analysis of the analysis from Dear John Thain (guest-posted at Clusterstock). It’s invaluable. Here’s his conclusion:
I just don’t see how Bank of America can fill this hole and not get the government to “bail it out†with a conversion. The fact that Bank of America argued the results of the test, frankly, bolsters this point of view. Further, this has been talked about as an event that requires a management change, hence my comment on Lewis. (Confidence: 80% that the government has to convert to get Bank of America to “well capitalized†status)
His commentary is full of interesting tidbits. For example, it’s rather apparent that Bank of America top management are incapable of simple primary school arithmetic. We shouldn’t be surprised that they didn’t have enough comprehension of higher mathematics necessary to understand the complex financial instruments they were gambling on.
Based on my grade school math BoA is already $45 billion out to the federal government and they need to raise an additional roughly $34 billion. Sounds like more than the company is worth to me.
One of the particularly intriguing points is this from the stress test methodology which I’ll acknowledge I have not read in full, the “notorious Footnote 6”: “Under the baseline scenario, BHCs were instructed to assume no further losses beyond current marks”.
It’s possible that may cast some light on what my banker friend told me and which I’ve mentioned here earlier: that they were being told by bank regulators not to make loans. If banking regulators are construing the instruction to “assume no further losses” as “make no more loans”, it’s simultaneously excessive and inadequate. Excessive because it completely negates what the entire exercise is supposed to be accomplishing and inadequate because the banks can’t control the values of the assets that ultimately secure their gambles. It’s knowing the words but not the music.
Lets start releiving the stress of the American people, and let the big corporation giants see what foreclosures and bankruptcy is without any golden parachutes. And even jail time if found gouging the public!!
What I found particularly interesting were the market assumptions being used (professional, not government, numbers).
The test assumes that housing prices will continue to fall through the end of 2010. I thought housing prices were getting close to pre-bubble levels. But they are using the Case Schiller 10 city composite to make the projections, which means its weighted towards California (3 of the 10 cities). I think if I were an about-to-be nationalized bank, I would complain that a broader index is more appropriate. And if I knew where my mortgage backed securities originate from . . . well, I might not be in this mess.
For months I’ve believed that when you combine the proportion of defaults in California with the sheer volume of houses involved most of the problem being posed for all of the banks wherever located is a California problem.