By Alister
Bull and Karey
Wutkowski
WASHINGTON (Reuters) - The true dimensions of the
U.S. credit
crisis will become much clearer next week with
the release of results from unprecedented government
"stress tests" of the nation's 19 largest
banks and their capital needs.
The results are expected to show that the 19
banks must raise possibly $150 billion or more in
fresh capital, with investors expected to punish
stocks of the neediest banks.
"Most banks will have to raise capital in
some form," said FBR Capital Markets managing
director Paul Miller. "The capital raises will
be much bigger than people think."
Uncertainty about what the tests might reveal had
made banks stocks "uninvestable" at this
point, he added. "You just don't know how the
government is going to view it."
Public release of the stress test results is set
for Thursday, a government official said. A source
told Reuters U.S. officials plan to brief the banks
themselves on Tuesday.
The stress tests have transfixed markets for
weeks, shaping a suspenseful episode in the ongoing
financial crisis that has worsened the U.S.
recession and shaken economies worldwide, burdening
the newly arrived Obama administration and Congress.
It stems from hundreds of billions of dollars in
shaky assets on banks' books. Accumulated during a
massive debt bubble, when real estate soared and
exotic debt securities multiplied, these assets are
now clogging credit markets.
"I can't think of a time since I've been
watching banks when there's been so much uncertainty
about the true value of a key set of assets,"
said Douglas Elliott, a fellow at the Brookings
Institution, a Washington think tank. He estimates
the 19 banks must raise between $100 billion and
$150 billion.
The banks being tested include Citigroup Inc,
Bank of America Corp, JPMorgan Chase & Co, Wells
Fargo & Co and Goldman Sachs. Together, the 19
banks hold two-thirds of total U.S. bank assets.
CUSHION PADDING
When results are announced late next Thursday,
analysts believe the government will say all 19
banks are solvent, but that some need to raise more
capital than others to cushion themselves in case
the U.S. recession deepens.
The banks likely to be tagged as needing the most
fresh capital are Citi and Bank of America, said
Fred Dickson, chief market strategist at D.A.
Davidson & Co.
Below those two, the next banks needing the most
capital will likely be JPMorgan and Wells Fargo, he
said, adding that this would likely halt a recent
recovery in bank stocks.
"My guess is we will see another fairly
significant sell-off of banks that are going to be
involved," he said.
"The recent market rally I think has been a
lot due to short-covering." Continued...
