Rumors The Ten Of 19 Banks Failed "Stress Tests" (WFC)(BAC)(C)

Several news organizations are reporting that ten of the 19 banks subjected to “stress tests” will be asked to raise more capital. Since the firms are still debating with the government, the number could change. It is not clear whether the problem can be solved, at last at some of the banks, by converting preferred shares to common, which would cause significant dilution for existing shareholders.

Among the largest banks on the list of those that will need new capital are Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC).

Because of their size, these three banks may be able to bring in enough private capital to avoid the de facto nationalization that comes with having federal government ownership of 50% or more of common shares. Some of the smaller banks on the government’s list may not be as lucky, particularly if they need to bring in $5 billion or more. Fifth Third (FITB) has a market cap of $2.8 billion. Regions Financial’s (RF) is at $3.8 billion. Sun Trust (STI) would be on the bubble of facing the government having a controlling interest with a market cap of $6.2 billion.

If the government does gain voting control at three or four banks, the question is what it will do to exert its rights, if it will do anything at all. Fed officials would probably have to select and approve board members. Sitting CEOs might be forced to resign. In other words, the government would be spending more time bailing out the banking system when the “stress test” results come out and not less.

Douglas A. McIntyre