JPMorgan, Goldman Sachs to Gain as Rivals Seek Funds

....and Obomba promices in a speach last night that "no bank will fail," then cuts Billions from 100 Fed programs

(Update1)

By Linda Shen and Ari Levy

May 8 (Bloomberg) -- JPMorgan Chase & Co. and Goldman Sachs Group Inc., banks that passed government stress tests without needing fresh capital, may win more backing from customers and shareholders as competitors such as Bank of America Corp. and Citigroup Inc. raise funds by giving up assets or equity.

Ten of the 19 lenders tested must raise capital, led by Charlotte, North Carolina-based Bank of America, which needs $33.9 billion, according to results released by the Federal Reserve yesterday. New York-based Citigroup, ranked second by assets after Bank of America, needs $5.5 billion. San Francisco- based Wells Fargo & Co., ranked fourth, needs $13.7 billion.

Plugging the gaps may preoccupy management while lenders that don’t need funds are freed to repay U.S. bailout funds and escape curbs on lending and compensation, according to Samuel Hayes, professor emeritus of investment banking at Harvard Business School. The nine banks that don’t need funds may be able to grab market share and talent until rivals are able to repay their share of funds borrowed from the $700 billion U.S. rescue fund.

“There are certain banks that are going to emerge as being the blue-chip standard against which other banks will be measured,” Hayes said. “Their cost of money will be lower. People are going to feel more comfortable about lodging money with them. They will certainly get more clients.”

JPMorgan traded at $36.56 as of 10:27 a.m. in Frankfurt, compared with yesterday’s New York closing price of $35.24. Goldman Sachs traded for $135.46 in Frankfurt, compared with $133.73 yesterday in New York. Bank of America traded at $15.13 in Frankfurt, compared with $13.51 yesterday in New York. Citigroup traded at $4.31 in Frankfurt, compared with $3.81.

Potential Management Changes

Banks that raised money by selling preferred shares to the Treasury’s Troubled Asset Relief Program are subject to restrictions on executive pay and perks, which executives have blamed for the loss of key employees. The government also has said it may remove the executives and directors of any company that needs more taxpayer funds. Treasury Secretary Timothy Geithner didn’t rule out forcing management changes after the tests are completed.

New York-based American Express Co. said yesterday it planned to repay TARP funds and will start talking to regulators within days. JPMorgan Chief Executive Officer Jamie Dimon said on a conference call that he’d like to repay the $25 billion it got from the government “as soon as we can,” reiterating comments he has made several times in April and May.

Goldman Sachs on April 14 raised $5 billion selling shares to help repay its $10 billion TARP investment, and CEO Lloyd Blankfein has said he wants to return the funds to run his bank without any limits on compensation.

‘More Adverse Scenario’

The Treasury has said banks can raise money from new or existing shareholders, convert preferred shares sold to the government and private investors into common equity, or sell assets. Failing that, they can seek funds left over in TARP.

The stress test included hypothetical projections of how much banks would need under a “more adverse scenario” in which the recession deepens more than expected, and the report listed potential losses by types of loans. Banks that passed the tests may still suffer loan losses.

Most of the potential losses at JPMorgan, Bank of America and Citigroup will likely come from credit card and home equity loans, the government said. JPMorgan’s losses through 2010 in both categories could reach $41.3 billion, Bank of America’s losses could be $40.5 billion and Citigroup may see $32.1 billion in losses on the loans.

Bair Weighs In

In commercial real estate lending, Fifth Third Bancorp, a Cincinnati-based lender judged to need $1.1 billion in capital, could have losses of $2.9 billion, or 13.9 percent of total CRE loans, the government’s assessment found. BB&T Corp. could lose $4.5 billion, or 12.6 percent of the total, and KeyCorp may have $2.3 billion in defaults, or 12.5 percent. BB&T, based in Winston-Salem, North Carolina, doesn’t need more capital, while Cleveland’s KeyCorp needs $1.8 billion.

Trading and counterparty losses at Morgan Stanley could be $18.7 billion, while those at Goldman Sachs may reach $17.4 billion. Losses on second-lien mortgages at Citigroup may rise to $12.2 billion, or 19.5 percent of the total.

“They all exceed their regulatory standards for well- capitalized right now,” Federal Deposit Insurance Corp. Chairman Sheila Bair said in an interview yesterday. “The stress tests were to make sure they have enough of a capital buffer if there are more losses for the next couple of years.”

Instilling Confidence

None of the banks is in danger of failing, according to Geithner, who said May 6 the test results are “reassuring.” The 24-company KBW Bank Index has rallied 21 percent this week on speculation that capital gaps would be less than expected and that the tests wouldn’t lead to any government takeovers.

“The purpose was very simply to instill confidence into the market that the banks weren’t all insolvent,” said Jennifer Thompson, an analyst at Portales Partners LLC. “Based on the stock prices, it sure looked like it’s had its desired effect.”

One way for banks to bolster their financial health is to cut back on lending, former FDIC Chairman William Isaac said in a May 6 interview. Banks have been foregoing market share by curbing credit lines on loans and credit cards to limit future losses, blunting the impact of TARP, which was designed to stimulate the banking system and the economy.

“Banks can’t lend more and satisfy their capital requirements,” said Isaac, who is now an industry consultant.

Bank of America, the nation’s biggest consumer lender, won’t curb lending because that would contradict the point of TARP, CEO Kenneth Lewis told reporters yesterday in a conference call.

‘Why Risk It?’

About 45 percent of U.S. banks reduced credit limits for new or existing credit-card customers in the fourth quarter of 2008, according to a Federal Reserve January survey of senior loan officers. Financial institutions may slash $2 trillion in credit-card lines in the next 18 months, Meredith Whitney, a former Oppenheimer & Co. analyst, wrote in a Nov. 30 report.

Wells Fargo may use a mix of techniques to raise capital including shrinking the balance sheet, converting preferred shares and selling common shares, according to David Trone at Fox-Pitt Kelton Cochran Caronia Waller. The rally in bank stocks makes the latter option more attractive and may reduce the need for converting preferred stock, said Moshe Orenbuch, an analyst at Credit Suisse AG, in a Bloomberg Television interview yesterday.

Temporary Advantage

Lenders that escaped demands to raise more capital may find their advantage is only temporary because the economy is still deteriorating, said Josh Siegel, co-founder of New York- based StoneCastle Partners LLC, which manages about $2.3 billion, including stakes in Bank of America, Citigroup and JPMorgan Chase. He said rushing to repay TARP funds would show “a lack of foresight” by bank managers.

“What’s going to happen when things gets bad again -- why risk it?” Siegel said.

The government holds preferred stock valued at $45 billion in both Bank of America and Citigroup. It may have a 44 percent stake in Bank of America if the stake is converted to common stock, according to analysts at Barclay’s Capital, giving it a near-majority in shareholder votes. The U.S. stake in Citigroup may total 34 percent under a Feb. 27 plan.

To contact the reporters on this story: Linda Shen in New York at lshen21@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net.

Last Updated: May 8, 2009 04:34 EDT


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