naked capitalism

The drip drip drip of stress test rumors is disconcerting, and I am perplexed at the logic. I could have seen leaks early on, to box the banks in, particularly since the markets are insisting on rallying on what ought to be bad news (and if you think the bank capital raises are over, I have a bridge I’d like to sell you).

Wells having to go to the well (no pun intended) was predictable, given that they have loudly protested the stress tests from the get-go. However, we’ve seen a reversal of the initial party line that few banks would be able asked to boost equity levels. For instance, I can’t recall any early reports predicting that Morgan Stanley would be required to bolster its balance sheet (not that I think it isn’t necessary, given my expectation of further writedowns, but that it doesn’t appear to have been anticipated).

Citi has reportedly gotten the authorities to lower the amount it has to raise from $10 billion to $5 or $6 based on pending asset sales. But those also reduce earnings power and depending on the book value versus the sale price of the businesses, may increase liquidity without actually increasing net worth. I must confess to not knowing the performance of the units on the block, but distressed sellers typically wind up selling their best assets (Lehman in its attempt to monetize its asset management business at the 11th hour was a classic case). Citi is obviously assuming it fares better than AIG did on this front.

From the Wall Street Journal:

Results of the government’s stress tests of the nation’s largest 19 banks started to trickle out Wednesday, highlighting the burgeoning gaps between the industry’s strong and weak players.

Among the institutions that have been instructed by the Federal Reserve to raise more capital are Wells Fargo & Co., Morgan Stanley, GMAC, State Street Corp., Bank of America Corp., Citigroup Inc. and Regions Financial Corp., according to people familiar with the matter. The banks with the biggest capital deficiencies are Bank of America, with a $34 billion hole; Wells Fargo, which needs to raise $15 billion; and GMAC, which faces a $11.5 billion shortfall, the people said.

Healthy banks that don’t need fatter capital cushions include American Express Co., Bank of New York Mellon Corp., Capital One Financial Corp., Goldman Sachs Group Inc., MetLife and J.P. Morgan Chase & Co., other people said.

Investors on Wednesday were eagerly awaiting word of the test results at several large regional banks, including KeyCorp, Fifth Third Bancorp, BB&T Corp., PNC Financial Services Group Inc. and SunTrust Banks Inc…

However, the Federal Reserve has instructed Citigroup to raise $5 billion to $6 billion in additional capital as part of the recently completed stress tests.

The capital hole is considerably smaller than what Fed officials had initially identified. The shrinking gap reflects Citigroup’s successful efforts to persuade the Fed to give it credit for some of its pending capital-raising initiatives, according to people familiar with the matter.

Citigroup executives believe they’ll be able to plug the hole by continuing to sell assets and by expanding the company’s planned conversion of preferred shares into common stock to include a wider range of securities, these people said. Citigroup, which has received $50 billion in taxpayer capital and soon will count the U.S. government as its largest shareholder, won’t need to get additional financial aid from Washington, these people said.