Bank losses near $600 billion in worst case scenario

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Losses at 19 of the nation's largest banks could be as high as $599 billion through the end of next year if the economy performs worse then expected. That's the gist of the stress tests just completed by the Fed. To strengthen the banking system, the Fed ordered 10 of the banks to raise a total of $74.6 billion, the other nine did not need additional capital.

Of the ten banks that need to raise money, Bank of America (BAC) faces the greatest challenge. It must raise an additional $33.9 billion. Wells Fargo (WFC) must raise $13.7 and it announced a $6 billion common-stock offering. Morgan Stanley (MS), which needs to raise $1.8 billion, said it will sell $2 billion of stock and $3 billion of debt that isn't guaranteed by the government.

GMAC, which faces a $11.5 billion capital shortfall, may need a bigger government bailout. The shortfall shown by the stress tests amounts to half of the company's $21.9 billion in total equity. That means GMAC is in the shakiest condition of all the banks tested.

Experts fear that with the results of these tests loans could become harder to get by consumers and businesses. With banks required to keep more of a cushion, they will need to hoard cash rather than lend it. Jim Eckenrode of the TowerGroup told The Wall Street Journal that banks will have less room to offer consumers low interest rates. Corporate customers may have a tough time getting financing for commercial real-estate and property development. By hoarding cash banks could actually slow economic recovery.

Regions Bank (RF) publicly criticized the testing process telling the Journal the loss assumptions were "unrealistically high" and it "questions whether it should be required to raise addiitonal capital now to provide for a two-year adverse economic scenario," given hints that the economy may have hit bottom. The adverse scenario Regions was referring to required the banks to look at two-years of cumulative losses of 9.1%, which is worse than the peak losses of the 1930s.

Some banks wll consider public equity or debt offerings to fill the shortage or pay back the government. Others will sell assets. Bank of America and Citigroup (C) have aleady announced they plan to sell assets.

State Street, which needs no additional capital, is now looking at "repayment of the TARP preferred stock and warrants" according to Chairman and Chief Executive Ronald Logue. State Street got $2 billion in taxpayer-funds. The Journal details a bank-by-bank summary of whether or not plans are in the works to repay TARP.

Now that the stress tests are completed, attention turns to the 8,000 other banks nationwide. Analysts at RBC Capital Markets told the Journal that 60 percent of the top 100 banks in the U.S. not included in the stress tests would need to raise new capital based on the Fed's loss assumptions. Small banks face a commercial lending crisis, as well as the weakened residential mortgage lending market.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies.
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