Wells Fargo raises $7.5 billion in stock offering Staff and wire reports Posted: 05/08/2009 09:22:49 AM PDT Updated: 05/08/2009 09:22:49 AM PDT
San Francisco-based Wells Fargo & Co., the fourth-largest U.S. bank by assets, raised $7.5 billion by selling shares at $22 each after the government found the bank didn't have enough capital to withstand a more prolonged recession.
Wells Fargo was told to raise an additional $13.7 billion after the U.S. government's stress tests on 19 banks, and the company said yesterday it planned to raise $6 billion by selling common stock. The San Francisco-based lender said in a statement today it is selling 341 million shares at $22 apiece, a 12 percent discount to Thursday's closing price of $24.76.
"The demand obviously turned out to be very significant, which is obviously very pleasing and exceptional," Chief Financial Officer Howard Atkins said in an interview today. "We generate a lot of capital internally, mostly through retained earnings, and we expect the natural course of business to get us" the rest. http://www.insidebayarea.com/business/ci_12326191
S&P Takes Citi, BofA Off Downgrade Watch Standard & Poor's Ratings Service removed Citigroup Inc.(C) and Bank of America Corp. (BAC) from watch for downgrade, saying the banks' efforts to boost capital should provide enough cushion against future losses.
2 Banks Cited in Stress Tests Find Ready Investors A day after the bank stress tests were released, two major institutions, Wells Fargo and Morgan Stanley, handily raised billions of dollars in the capital markets on Friday to satisfy new federal demands for more capital. A third, Bank of America, hastily laid out plans to sell billions of dollars in new stock.
The speed and ease with which the banks swung into action, combined with a surge in financial shares, was hailed as a sign that confidence was returning to the financial industry. The sales seemed to put to rest questions about whether big banks would be able to lure private investors, rather than have to turn to the government again.
While the results of the tests on 19 major banks, released by the administration on Thursday, were far more positive than many had expected, they nevertheless created an immediate urgency for 10 banks to raise new capital. Federal regulators ordered them to raise a combined $75 billion to buffer their potential losses.
With some off to such a rapid start — Goldman Sachs raised $5 billion before the stress test results were announced — the race is now on among the most robust to repay the government money they received last fall and so escape from government control.
But while the mood was generally buoyant among these leaders, others still have to spell out how exactly they will raise money — or accept further federal aid.
GMAC, the onetime finance arm of General Motors, was deemed by the regulators to need an extra $11.5 billion in capital. On Friday, Treasury Secretary Timothy F. Geithner indicated that this was likely to have to come from the government and that the administration would stand behind GMAC.
The stress tests estimated how much each bank would lose if the economic downturn proved even deeper than currently expected: under the worst-case assumptions, with an unemployment rate of 10.3 percent, the losses by the 19 banks could total $600 billion.
On Friday, economic data showed the American economy lost a further 539,000 jobs in April and the unemployment rate leapt to 8.9 percent — a sign that the United States might already be heading toward the worst case, although the job losses were less than Wall Street expected.
Despite the sobering outlook, the mood on Wall Street was generally upbeat after the rosier-than-expected assessment of the biggest banks. The stock market climbed, with the Standard & Poor’s 500-stock index gaining 2.4 percent on Friday.
“If there were holes in this, the market would have seen it,” said Stuart Plesser, an analyst at Standard & Poor’s.
In the capital-raising exercises, Wells Fargo sold $7.5 billion of common stock; regulators ruled it needed to fill a capital hole of $13.7 billion.
Morgan Stanley raised $8 billion by selling $4 billion in common stock and $4 billion in bonds. It increased the total amount it raised compared with its initial plans by $3 billion because of strong investor demand, it said. Regulators had declared that the investment bank needed to raise money to fill a $1.8 billion hole.
In an important signal of its future intentions, Morgan Stanley raised its debt without the guarantee of the Federal Deposit Insurance Corporation — a show of strength that is one of the government’s requirements for paying back money from the Troubled Asset Relief Program. JPMorgan Chase and Goldman Sachs, which are also eager to repay TARP funds, have recently gone through similar debt-raising exercises.
Bank of America, judged one of the weaker institutions, registered its intention to sell 1.25 billion common shares over the coming weeks. At Friday’s closing stock price, that amount of stock would be valued at nearly $18 billion, which means the bank might not have to turn to another possible means of raising money like converting preferred shares into common equity.
Citigroup, which for many has come to stand for the problems plaguing the financial industry, was told by regulators that it must raise $5.5 billion, in addition to its recent efforts to raise capital by selling businesses and converting to common stock just over half of the $45 billion of its preferred stock held by the government.
On Friday, Vikram S. Pandit, Citi’s chief executive, held a town hall meeting at Citigroup’s investment banking offices in New York, where he told staff members the test results had validated his strategy of righting the company.
But Meredith A. Whitney, a prominent banking analyst, said the results underscored the difficulties banks faced. Many are likely to experience several more quarters of poor financial results.
“The revenue environment is very different,” Ms. Whitney said. Given the recession, banks are not going to make much money from credit cards or originating mortgages, she said. And even if all the banks secured more capital, they still might not lend, holding back the economy.
Some analysts are now saying that some of the assumptions even in the worst-case situation may turn out to be too optimistic.
Given this, attention is now turning to the thousands of smaller banks elsewhere in the country and whether they will be able to survive any deterioration in economic conditions. Mr. Plesser said that these banks would face extra capital needs and that there might be consolidation among them.
Stress tests do little to fix banks' asset problem
By DANIEL WAGNER and STEVENSON JACOBS – 3 hours ago
WASHINGTON (AP) — The big banks got through the government's "stress tests" with only minor bruising. But a bigger test awaits them: Getting rid of the bad assets that helped ignite the financial crisis in the first place.
It won't be easy. A Treasury program announced three months ago to help private investors buy up those assets hasn't even begun. Some banks are threatening not to participate. They fear they won't fetch a high enough price for their soured mortgage-related debt, which was bought at the height of the housing boom.
Removing the bad assets is needed to fix the banks and help revive the economy. Unless they can sell off these assets, banks won't be able to resume normal lending and rebuild confidence in the financial system, even if they have enough money to survive.
The International Monetary Fund has estimated U.S. financial institutions could ultimately lose $2.7 trillion from the global credit crisis.
The stress tests said the 19 largest banks could lose $600 billion by the end of 2010 if the recession worsened. Of that sum, about $135 billion involves trades with other banks and investments, including mortgage-backed securities — the kinds of assets that have come to be called toxic.
But many experts say those estimates undercount potential losses on bad assets.
One reason is the tests didn't assess such risks for firms with less than $100 billion in their trading portfolios. Another is that the calculation of capital levels assumed the assets were worth what banks say they are, not what the market would pay.
The tests helped clarify the banks' capital needs, said Richard R. Zabel, an accountant at Robins, Kaplan, Miller & Ciresi. But they didn't make dealing with the core of the financial crisis — troubled bank assets — any easier, he said.
By itself, pumping $75 billion more capital into 10 of the nation's 19 largest banks, as prescribed by the stress tests, "won't eliminate the problem" of bad assets, he said.
"The stress tests were hypothetical," Zabel said. "Now we have to deal with reality, and until you remove toxic assets, they are going to be an issue. If we continue to have home foreclosures and high unemployment, the value of these assets are going to continue to deteriorate."
The banks' bad assets — those that have lost value or can't be sold — were the target of Treasury Secretary Henry Paulson's original bank rescue plan last fall. His successor, Timothy Geithner, outlined his own plan to help private investors buy up the assets on Feb. 10.
The program aims to entice investors to buy up to a half-trillion dollars of bad assets, to shore up banks' capital and unlock credit. The program could later be expanded to $1 trillion.
So far, there's been little sign of progress.
Treasury started accepting applications from private companies that want to manage the program, then changed the terms. It announced last week that it had received 100 applications to participate. But Treasury has yet to provide much detail about how the program will work. Large banks, including JPMorgan Chase & Co., have balked at signing up, wary of possible federal curbs on executive pay.
In an interview this week on PBS' "The Charlie Rose Show," Geithner said the program will be "up and running in the next four to six weeks."
He described the program as a companion to the stress tests, saying, "The stress test will increase certain incentives to sell, because it will require them to hold more capital against the loans on their balance sheets."
But the stress tests undercounted the banks' possible losses on complex assets, said Frederick Cannon, of the research firm Keefe, Bruyette & Woods.
Cannon said he was shocked that the test didn't forecast Wells Fargo & Co. losing any money from its exposure related to other institutions' debt. He said the bank acknowledged in a recent filing it had $120 billion at risk if guarantees on certain investments go bad.
The government applied a harsh test to loans the banks hold, Cannon said, but used a more lenient test for assets. Firms with less than $100 billion in their trading accounts were not even evaluated for this kind of risk.
And they were required to hold capital against only half their mortgage-related securities — a formula for "risk-weighted assets" that Cannon said is outdated.
In recent years, banks started relying on increasingly complex securities deals to spread risk across the system. Many of their problem assets are hard to value, because they're backed by huge and diverse pools of mortgages.
Once home values began falling in 2007, owners started having trouble refinancing mortgage loans. Defaults rose. That caused bank assets to lose value. Soon, buyers became unwilling to pay market rates for a wide swath of mortgage-related assets, even those that were performing well.
Uncertainty about what these assets are worth is preventing the financial system from fully recovering, experts say. Buyers are unwilling to pay anything close to what the banks say they're worth.
"There's no fire sale, and the guys who want to buy stuff would rather buy from people who are under pressure," said Simon Johnson, a former IMF chief economist now at the Massachusetts Institute of Technology's Sloan School of Business.
He pointed to problems with the government's strategy, including its willingness to keep pouring billions into the banks. Banks "feel no pressure to sell" because they are confident the government will keep subsidizing them, Johnson said.
Taxpayer advocates also say Treasury's plan puts too much risk on taxpayers and too little on the private investors. In report last month to Congress, the special inspector general for the financial rescue said the program favors private investors and creates "potential unfairness to the taxpayer."
The program "is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives," the report said.
But the program doesn't have to deal with every bad asset the banks hold. All the government has to do is "chum the waters" with enough subsidies that private investors start buying again, said William Seidman, who headed the Federal Deposit Insurance Corp. during the savings and loan crisis.
That's one reason the government is providing such low-risk financing to the hedge funds and others that take part in the program, said Christian Menegatti, lead analyst at RGE Monitor.
Hedge fund manager Steven Persky, who's raised $400 million to buy mortgage-backed securities, said his firm has applied to participate in the private-public partnership. But he hasn't decided if it will.
A big problem, Persky said, is that the rules still haven't been clearly laid out three months after the program was announced.
Investors, for example, still don't know if they'll be subject to federal compensation limits applied to bank executives whose firms took money from Treasury.
At least 10 major banks have met two preconditions for paying back U.S. government money, or plan to soon.
These banks have sold common shares, or plan to; and have also sold non - government - guaranteed debt. These are key conditions for paying back money borrowed under the U.S. Troubled Asset Relief Program.
The 19 banks listed below were each tested for capital adequacy under special government "stress tests," which account for expected losses over the next two years if the economy fails to improve.
JP Morgan, Goldman among banks set to repay TARP Regulators may approve exits next week in sign financial system is more stable
J.P. Morgan Chase, Goldman Sachs and some other large U.S. banks will likely be given the go-ahead to repay billions of dollars in government money next week, suggesting authorities are more comfortable about the stability of the financial system.
Other banks that may be approved next week to repay money from the Troubled Asset Relief Program, or TARP, include Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 30.95, -0.02, -0.07%) , American Express /quotes/comstock/13*!axp/quotes/nls/axp (AXP 24.96, +0.01, +0.04%) , Bank of New York Mellon /quotes/comstock/13*!bk/quotes/nls/bk (BK 28.28, +0.06, +0.21%) , State Street /quotes/comstock/13*!stt/quotes/nls/stt (STT 47.00, -0.27, -0.57%) , US Bancorp /quotes/comstock/13*!usb/quotes/nls/usb (USB 18.03, +0.03, +0.17%) and BB&T Corp. /quotes/comstock/13*!bbt/quotes/nls/bbt (BBT 21.50, +0.09, +0.42%) .
Other big banks face a longer path to TARP freedom, including Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 11.88, -0.03, -0.25%) , Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 3.46, -0.11, -3.08%) and Wells Fargo /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 24.70, -0.02, -0.08%) .
Still, the fact that the government and industry regulators are willing to unleash some of the nation's largest banks shows how much they think the environment has improved in recent months, analysts said.
In February, the markets panicked at the prospect of some big U.S. banks possibly being nationalized. Less than four months later, the industry has raised more than $65 billion in new capital by selling new shares and other equity-linked securities to private investors, according to Keefe, Bruyette & Woods.
"We've seen government programs address liquidity and capital concerns pretty well," Fred Cannon, a bank analyst at KBW, said in an interview. "The fact that banks have been able to access capital markets is a good sign."
Treasury Secretary Timothy Geithner has said on several occasions that before the government lets financial institutions repay TARP he must be comfortable that they can raise capital on their own and that the financial markets are stable.
In May, Geithner told lawmakers that the Treasury, the Federal Reserve and the Office of Comptroller of the Currency would consider both the health of each institution and the economy "as a whole" before deciding whether to let banks return the funds.
In early May, the government announced the results from stress tests of the largest U.S. banks, ordering them to raise almost $75 billion in new equity capital.
However, nine companies were told they didn't need extra capital: J.P. Morgan, Goldman, American Express, BB&T, Capital One Financial /quotes/comstock/13*!cof/quotes/nls/cof (COF 24.20, +0.09, +0.37%) , Bank of New York, State Street, US Bancorp and insurer MetLife /quotes/comstock/13*!met/quotes/nls/met (MET 31.25, -0.20, -0.64%) .
On June 1, the Federal Reserve outlined criteria it will use to pick which stress-test banks can repay TARP money.
"Redemption approvals for an initial set of these large bank holding companies are expected to be announced during the week of June 8," the Fed said in a statement.
Before being allowed out, a bank has to issue debt that isn't guaranteed by the Federal Deposit Insurance Corporation and must sell new shares in private capital markets, the Fed explained.
Banks must also be financially strong enough to keep lending to creditworthy consumers and businesses after they return TARP money, the Fed added.
J.P. Morgan, Goldman, Morgan Stanley, American Express, Bank of New York Mellon, State Street, US Bancorp and BB&T Corp. have sold new common stock to private investors and have issued non-guaranteed debt, meeting two of the main criteria for exiting TARP.
Treasury Dials Back Plan to Aid Banks Less Help to Investors Buying Toxic Assets
Nine private firms have been selected to partner with the government and run the investment funds that will purchase toxic assets. These include a subsidiary of General Electric, one of the largest recipients of federal aid, and BlackRock, which the government already has tapped for several other roles.
The fund managers have to put in $20 million of their own money and each raise at least $500 million over the next 12 weeks. At that point, the program can finally begin.
The other firms selected by the Treasury are AllianceBernstein, Invesco, Marathon Asset Management, Oaktree Capital Management, RLJ Western Asset Management, TCW Group and Wellington Management. GE Capital Real Estate will participate as a joint venture with Angelo, Gordon & Co. These firms will partner with 10 small minority-owned and woman-owned financial services business, Treasury officials said.
Buying toxic assets was of paramount importance to government officials last fall when Congress approved the $700 billion bailout, dubbed the Troubled Assets Relief Program. But weeks after the measure became law, the Treasury decided to use most of the first installment of those funds to inject capital directly into banks. Once President Obama was sworn into office, Treasury officials again urged that buying toxic assets remained critical.
Separate from the securities derived from troubled loans, there are trillions of dollars in distressed residential and commercial mortgages on the balance sheets of banks, industry analysts said. But an effort led by the Federal Deposit Insurance Corp. to buy these loans was shelved last month because of a lack of interest from buyers and sellers.
The U.S. Treasury Department allowed 11 smaller banks to repurchase stock warrants at only 66 percent of their market value, passing up about $10 million of taxpayer profits from government bailouts, a U.S. watchdog panel said on Friday.
In a new monthly report, the Congressional Oversight Panel said the government could lose $2.1 billion if it accepts similar valuation levels on warrants repurchased by remaining banks that received government capital injections.
The panel said the Treasury must apply a vigorous, transparent approach to valuing warrants and should consider leaving valuation to the markets by selling the securities in an open, public auction. http://www.reuters.com/article/ousiv/idUSTRE5690KB20090710
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