U.S. Fed: 9 of 10 large banks met capital goals

November 9, 2009

By David Lawder
WASHINGTON, Nov 9 (Reuters) – Nine of 10 large U.S. banks ordered to raise capital in May have met or exceeded their goals and the laggard — auto lender GMAC Financial Services — is negotiating for a fresh infusion of taxpayer funds.

The Federal Reserve said on Monday the 10 banks determined by regulatory stress tests to need bigger cushions against losses had boosted their Tier 1 common equity by a combined $77 billion. They had been told to
raise $74.6 billion.

GMAC is expected to access the Troubled Asset Relief Programs Automotive Industry Financing Program to meet its capital need and is in discussions with the U.S. Treasury on the structure of its investment, the Treasury Department said.

The department said on Monday it will immediately close its Capital Assistance Program, set up last spring for bank stress tests, because GMAC is the only firm needing taxpayer funds and will use an auto industry support program instead.

GMAC Financial Services has indicated it will need less funding than was expected in May, Treasury said.

The Treasury and Fed ordered the stress tests last spring in a bid to reassure jittery investors that the 19 largest U.S. banks would be able to withstand a deepening recession.

Regulators told them to increase capital based on projected losses under various economic scenarios, including one labeled “adverse” that envisioned a 10.3 percent unemployment rate next year.

But joblessness may already be exceeding that level. On Friday, Labor Department data revealed a 10.2 percent unemployment rate for October, and the White House said it would likely rise further before the jobs picture improves.

Nonetheless, the Fed said the stress tests were designed to ensure that the banks would stay sufficiently capitalized through 2010 and continue lending to creditworthy borrowers. Their release calmed investors enough to draw new investment into banks and sparked a massive stock market rally over the summer months.

“The release of the assessment results provided
important information about the condition of major U.S. financial institutions during a period of high stress and uncertainty, and helped to increase public confidence in
the banking system,” the Fed said.
GMAC was ordered to raise $11.5 billion in the six months following the stress tests results in early May, with a deadline of Monday. The firm quickly received a $7.5 billion capital injection and has sold government-backed debt. Treasury officials have said they knew it was likely the government would need to contribute more capital to the company because as a privately held firm, it had little ability to sell shares.

GMAC’s owners include the General Motors C0, and private equity firm Cerberus Capital Management. Among other lending, it provides financing to buyers of vehicles made by GM and Chrysler Group — two automakers with big government stakes.

The Fed’s announcement that GMAC was still negotiating for government capital follows four days after Treasury assistant secretary Herbert Allison told Reuters in an interview the Treasury needed more deliberation over the structure of the investment and it might be delayed past the Monday deadline.

But the Fed said the bank holding companies together raised $71 billion in common equity by issuing shares or other eligible securities totaling $39 billion; converting $23 billion worth of existing preferred shares to common equity; and selling businesses or asset portfolios to increase common equity of $9 billion.

Some firms also had increased capital by reducing dividend payments, issuing common shares to employee stock ownership plans and through larger-than-anticipated pre-provisioning of net revenue to meet required capital buffers.

(Reporting by David Lawder; Editing by Kenneth Barry) ((david.lawder@thomsonreuters.com; +1 202 898 8395; Reuters Messaging: david.lawder.reuters.com@reuters.net)) Keywords: USA FED/BANKS

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