The stress tests have been completed and the major banks in the
system will need to raise $75 bil. in primary capital by this Fall.
That would augment system capital by 6.3% and strengthen the
capital bases of the majors who are primary dealers, market
makers and major players in the secondary and syndication
markets. Most of the tainted banks have already been named.
What these guys need to do is raise capital with the lowest
dividend cost they can to preserve cash. The thrust will be to
sell as much common as the market will bear and to convert the
higher cost preferreds. There is about $110 bil. of TARP money left.
The capital funding will be dilutive to common shareholders, but
there can be few surprises there. Other banks who are not directed
to raise capital will raise additional funds as well, subject to market
conditions.
The banking system needs the $75 bil. of new money as system
capital has remained flat, with continuing strong net interest
margin having been offset by rising loan loss reserves. The banks
also need cash liquidity, as the run off commercial loans has been
slow so far.
My estimate has been that the banks made about $1.5 tril. of
speculative loans over the past 5 years. The loans range from the
savvy and profitable to garbage. It is unwise to assume that
the industry is now free of further strong direction from Treasury
regarding capital. Another round could come if the economy does
not show signs of recovery over the next 9-12 months.
On balance the Treasury's disclosures were well advertised and
discounted prior to today's release.
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