Ten out of the 19 largest US banks must raise $75bn of extra capital under the "stress tests" aimed at restoring confidence in the country's battered banking sector, according to long awaited government data revealed last night.
Among the banks, which hold two thirds of all deposits in the system, being given a clean bill of health, according to a series of media leaks this week, are JPMorgan Chase, Goldman Sachs, Metlife, Capital One Financial, and Bank of New York Mellon.
Bank of America is understood to need the largest cushion, an extra $34bn of capital. Wells Fargo is next with $13.7bn, while GMAC, the financial arm of stricken General Motors, is deemed to need $11.5bn. Citigroup has to find a further $5bn of capital, while the investment bank Morgan Stanley must cover a shortfall of $1.8bn.
Results of the tests, an unprecedented financial health check up for the country's biggest financial institutions, were announced by the Treasury and the Federal Reserve, an hour after the closure of US markets. Initial reaction was positive, with many of the banks posting gains in after-hours trading.
The exercise was based a 'worst case' economic scenario for 2009 and 2010, in which the banks were judged on whether they had enough capital to withstand heavy losses on bad mortgages, commercial real estate and consumer loans. Investigators who spent seven weeks going through the banks' books found that the 19 between them faced $599bn of potential losses over the period, including $185bn on mortgages, $100bn on trading and counterparty activities, $53bn on commercial real estate, and $82bn on credit card loans.
Even before the stress test results were announced, both Wells Fargo and Citigroup announced steps to raise fresh money, the former with a stock offering of $6bn, the latter with an equity conversion of $5bn. Morgan Stanley says it will make good its shortfall by issuing new shares and selling assets. Even so, some banks may have no choice but to accept a hefty infusion of capital from the government, resulting in public stakeholdings of 30 per cent or more. If Bank of America found the $34bn solely by converting government-owned preferred stock into common stock, the US would end up with a controlling 46 per cent.
In such cases, Mr Geithner warned in a television interview, the federal authorities would take a more active management role, and might force out some current top executives. The mere hint of such action is one reason banks are desperate to shake loose from the government the moment they can. Mr Geithner told the New York Times he expected banks to soon repay over $25bn of federal assistance.
* Stephen Friedman, the president of the New York Federal Reserve, resigned last night, amid questions about stock purchases in his former firm, Goldman Sachs. But a Fed statement denied Mr Friedman had in any way behaved improperly.