US Economy: US Major Banks Need to Raise More Money. No Kidding.

Washington, US, 8 May 2008. The results of the stress test of 19 major banks, ran by the Treasury and Federal Reserve, are in. US Banks need to raise more money. Frankly, you didn’t need to be Sherlock Holmes to work that one out …[br]

Washington, US, 8 May 2008. The results of the stress test of 19 major banks, ran by the Treasury and Federal Reserve, are in. US Banks need to raise more money. Frankly, you didn’t need to be Sherlock Holmes to work that one out …[br]

The stress test looked at various economic conditions to see if the banks would have enough capital to weather the expected losses. The worst case scenario involved unemployment reaching 10.3 per cent next year, an economic contraction of 3.3 per cent this year, and a further 22 per cent decline in house prices this year. Under this scenario, they estimate that banks would lose $600 billion this year and next

Critics (read: everyone but the government and banking community, or so it seems), say that the worse-case is now the base case. Unemployment has just reached 8.9 per cent today. That is a 26 year high, but it is going up by 500k – 600k claimants a month at the moment, so it is likely to get worse than 10.3 per cent before improving. It is estimated that GDP contracted 6.1 per cent in Q1 2009, and house prices are currently falling in the 20 per cent range in monthly year on year figures. Surely, then, the worse case should have been tougher?

Mr Bernanke, the Fed Chairman, described their predicament as being “between Scylla and Charybdis”, in other words they had to steer between being too soft and too hard. The regulators obviously feel they have carried out a balanced exercise, and the bankers agreed. Investors, with misgivings or not, have bid up the price of banks, and it looks like they will continue to strengthen. [br]

In total, the banks were asked to raise $75 billion, as follows:

Bank of America will need to raise $34.9 billion.

Wells Fargo (thanks to its Wachovia purchase) will need $13.7 billion.

Citigroup will need another $5.5 billion

GMAC, the financing arm of GM, has agreed to finance Chrysler purchases while that firm goes through bankruptcy. It has already received $5 billion in TARP money but needs another $11.5 billion. Morgan Stanley needs another $2 billion.

In theory this should make for depressing reading, with risks of more to come, but on Wall St and in much of Washington, this news has been greeted with near-feverish euphoria. Go figure.

Vladimir Gonzales, EconomyWatch.com