D-DAY FOR BANKS
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Some of the banks expected to need capital to shore up their balance sheets will likely find it difficult to drum up private-investor interest in their debt and equity as these institutions wrestle with the perception that they’re the financial markets’ problem kids.
Citigroup, Bank of America and several regional banks are expected to be among a list of institutions that may be required to bolster their balance sheets by as much as $10 billion or more after the government reveals the findings of its so-called stress tests of the 19 largest banks tomorrow.
Early today Reuters reported that BofA will need the largest amount, as much as $34 billion. Citi will require about $10 billion, the report said.
So far existing shareholders of Citigroup and BofA have taken a beating, as shares over the past year have sunk 87 percent and 70 percent, respectively.
And while the stocks of both banks have improved lately, investor appetite for bank debt and equity is still weak after many private investors have gotten burned after dabbling with banks. Sources point to TPG, which acquired a huge stake in Washington Mutual only to get hammered months later as the thrift ultimately was sold to JPMorgan Chase.
To be sure, investors are more optimistic than they were months ago, but they are still gun shy, noted one investor.
Moreover, Wall Street insiders argue that the banking system is still in tatters because banks are still having trouble raising debt without the aid of the Federal Deposit Insurance Corp. guarantee that was instituted in October.
Indeed, the government has told some institutions that want to pay back money they got from the Troubled Asset Relief Program that they will have to demonstrate that they can raise money in the public markets without the government’s backing.
So far, JPMorgan Chase, Goldman Sachs and Northern Trust are among a handful of institutions that have been able to tap the public markets successfully.
But other banks may have to resort to shopping assets considered sacred cows in order raise the money the government says they need.
Some have had hearty debates with Uncle Sam about the matter, arguing that they should get credit for asset sales that have not yet been completed or that they have earmarked for sale.
As a part of that push, Citi is hoping to book a sale of its stake in brokerage powerhouse Smith Barney to June.
Raising cash may also be achieved by converting some or all of the government’s preferred shares in these banks.
Citi already is expected to convert a portion of the $45 billion of government preferred shares on its books — a move expected to give Uncle Sam a 36 percent stake in the bank.
Still, critics have been arguing that the conversions are simply an accounting function and don’t adequately provide the sort of equity reserve that a wounded bank would need if the markets sour further.