Friday, May 08, 2009

The Bank Stress Test

Bank Stress Test
Bank Stress Test Video

Wall Street Survivor: If this news doesn't drag down stocks, it's hard to imagine what will. However, futures are pointing higher and the full results of the stress tests won't be released until 5PM eastern.

Where will this needed capital come from? Congress has already indicated that the government will not provide any more capital for financial institutions.

Regulators are ordering some of the largest U.S. banks to find tens of billions of dollars of capital to cushion themselves in the event of a deep economic downturn.

The results of government "stress tests" of the ability of the 19 largest U.S. banks to weather a deep recession will be released on Thursday at 5 p.m. EDT and are expected to show about half the banks need more capital.

While the reported capital shortfalls so far are much larger than analysts had expected, bank shares soared as investors got more clarity over how well the industry will cope with perhaps the most severe recession since World War Two.

Among banks needing capital, Bank of America Corp shares closed up 17.1 percent, Citigroup Inc rose 16.6 percent and Wells Fargo & Co rose 15.6 percent. The Standard & Poor's Financials Index gained 8.1 percent.

"The market likes the certainty of putting numbers on the worst-case scenarios of how much capital these banks need," said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California.

Regulators have told Bank of America it needs $34 billion, while Citigroup needs $5 billion and auto and mortgage lender GMAC LLC needs $11.5 billion, according to people familiar with the matter.

Citigroup's amount reflects its previously announced plan to convert some preferred shares into common stock. The various sources were not authorized to speak because the official stress test results are not public.

Wells Fargo needs $15 billion, Morgan Stanley needs $1.5 billion and Regions Financial Corp needs some capital, the Wall Street Journal said.

Bank of New York Mellon Corp does not need capital, a person familiar with the matter said.

American Express Co, Capital One Financial Corp, Goldman Sachs Group Inc, JPMorgan Chase & Co and MetLife Inc also do not need capital, the Journal said.

All the companies declined to comment.

In an interview on PBS' "Charlie Rose Show," U.S. Treasury Secretary Timothy Geithner said none of the 19 banks are at risk of insolvency. He also said the government does not want to get involved in day-to-day management at the banks.

Click here to view this Bank Stress Test Video.

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