Some bankers dismiss it as a half-hearted approach

TO BE NOTED:

SunTrust to Sell Stock and Cut Dividend

Update | 11:13 a.m.

SunTrust, one of the 10 large banks found wanting in the government’s recent stress tests, said Friday that it would take a number of actions to raise and conserve capital, including issuing new stock and slashing its dividend.

Regulators said last week that SunTrust, an Atlanta-based regional bank, needed more capital to absorb future losses in case the economic downturn is worse than expected.

SunTrust said it “plans to adjust the composition of its overall Tier 1 capital resources to increase the common equity portion by $2.2 billion,” which is equal to the amount the government said the bank will need to raise by fall to be in compliance with the capital levels under the federal stress tests’ “more adverse” economic scenario.

Under Suntrust’s plan, which it said was not final or formally approved, more than half of the capital would be raised through the sale of $1.25 billion in new stock, diluting current shareholders. The company said it would sell the stock from time to time through an at-the-market, or A.T.M., offering, in which a company sells stock periodically at various prices instead of all at once. Morgan Stanley would be the sales agent for the offering.

To conserve capital, the company will also cut its quarterly dividend from its current payout of 10 cents per share to 1 cent per share.

SunTrust is the latest bank to announce an A.T.M. stock offering, which allows it to dribble out shares to investors over time. Bank of America began a similar effort last week, following on the heels of smaller lenders like Zions Bancorp and Wilmington Trust.

A.T.M. stock deals are frowned upon on Wall Street for many reasons. For one, bankers collect fewer fees for underwriting the offering. Investors may see it as a sign of weakness, since the banks forgo the opportunity to pitch their business strategy, and a signal they are worried that an ordinary offering could fall short. Some bankers dismiss it as a half-hearted approach.

For Bank of America, some longtime advisers suggested that the deal was a way for the bank to placate regulators that it was trying to raise equity, even if it was unable to raise the full amount. The hope is that the economy will improve enough that it can avoid selling new shares. That would minimize any dilution to existing investors.

SunTrust may be in an even weaker position, and it will be interesting to see how its offering fares. The bank has been hit hard by the housing crisis, and many analysts expect it to suffer even bigger losses on commercial real estate loans.

As part of its capital plan, SunTrust also said Friday it would sell some securities and other assets that are expected to generate about $300 million in common equity. The company also said it had $3.3 billion of preferred stock and other securities on hand for which it could exchange for common stock, a move that would further dilute existing shareholders.

“We are fortunate to have many ways to address the common buffer required under the government’s More Adverse scenario,” James M. Wells III, SunTrust’s chairman and chief executive officer, said in a statement announcing the plan. “We will be prudent and proactive in evaluating and executing aspects of the plan prior to the November 9th deadline.”

The government found that SunTrust needed the additional capital after the stress test showed it could face losses for 2009 and 2010 of $11.8 billion, or 8.3 percent of its total loans. The company received $4.9 billion under the Treasury’s Troubled Asset Relief Program.

– Cyrus Sanati and Eric Dash"

the government stands behind the banking system and that their deposits are safe

TO BE NOTED: From Bloomberg:

"Geithner Bets U.S. Can Avoid Japan Trap Through Bank Earnings

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By Rich Miller and Matthew Benjamin

May 8 (Bloomberg) -- Treasury Secretary Timothy Geithner is betting that U.S. banks can do something their Japanese counterparts were unable to accomplish in that country’s “lost decade” of the 1990s: earn their way out of trouble.

The stress-test results released yesterday by regulators found that the 19 largest banks face a $74.6 billion capital hole that may be filled mostly by private money. That compares with the hundreds of billions of dollars seen by outside analysts, including the International Monetary Fund, and takes into account banks’ projected earnings over the next two years.

The “stress-test results are an important step forward,” Geithner said in a statement announcing the results. “Americans should know that the government stands behind the banking system and that their deposits are safe.”

Still, the strategy carries risks for Geithner, 47, who served as a Treasury attaché to Japan from 1989 to 1991. If he’s wrong about the banks’ ability to weather the worst recession in at least half a century, the U.S. may just be postponing the day of reckoning when institutions will have to be shut down and taken over by the government.

“This looks like Japan in 1998, when they didn’t spend enough money on the banks,” said Adam Posen, deputy director of the Washington-based Peterson Institute for International Economics. “They then ended up back in crisis in 2001.”

Paying Off

So far, Geithner’s gamble is paying off. Bank stocks have surged in recent weeks as investors bet the stress tests would give the lenders a clean bill of health. The Standard & Poor’s 500 Financials Index reached its highest level in four months on May 6 as the test results leaked out, before slipping 5.8 points yesterday to 162.3.

Geithner said the strategy was designed to ease the uncertainty that drove bank shares down earlier this year. By exposing the lenders to uniform tests and then publicizing the results, he hoped to reassure investors that their worst fears about the future of the banking system were unfounded.

Regulators led by the Federal Reserve found that nine of the 19 biggest banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., don’t need more capital. Bank of America Corp. has the biggest hole -- $33.9 billion -- followed by Wells Fargo & Co., with $13.7 billion. Banks that need to bolster capital have until June 8 to develop a plan and until Nov. 9 to implement it.

Potential Losses

Geithner told reporters that regulators took a conservative approach to toting up potential credit losses and calculating the industry’s ability to absorb them through increased earnings. The forecast of future profits was at the “quite low end of analysts’ expectations,” he said.

The results showed that losses at the banks under “more adverse” economic conditions than most economists anticipate could total $599.2 billion over two years. Mortgage losses present the biggest part of the risk, at $185.5 billion.

Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, said banks may be able to rack up enough earnings over the next two years to cover virtually all the remaining credit losses.

The contraction of the financial industry over the last year, including the demise of Bear Stearns Cos. and Lehman Brothers Holdings Inc., has put those that have survived in a better position to post profits, he said.

With the economy showing signs of being close to a bottom, some of the banks may even end up being overcapitalized, added Sung Won Sohn, an economics professor at California State University in Camarillo, California.

Too Easy?

Critics remain unconvinced and charge that the regulators went too easy on the banks in conducting the tests, which were designed to ensure the firms could keep lending even if the economy deteriorated more than most economists expect.

Examiners used an “adverse scenario” of a 3.3 percent contraction in the economy this year, and an average unemployment rate of 8.9 percent in 2009 and 10.3 percent in 2010. Economists see a 2.5 percent drop in output this year, and unemployment rates of 8.9 percent in 2009 and 9.4 percent in 2010, according to a Bloomberg News survey.

“The stress was not much of a stress,” said Joseph Stiglitz, a Nobel Prize winner in economics and professor at Columbia University in New York.

Skeptics of the plan such as Posen said Geithner was trying to make a virtue out of a necessity. With public opposition to bank bailouts high, the Treasury secretary felt constrained from asking Congress for more money to help the industry. Treasury has about $110 billion left in the $700 billion bank-rescue package approved by lawmakers last year.

Ready for More

Geithner said the Treasury had enough money remaining in the Troubled Asset Relief Program to cover the banking industry’s needs. Still, he made clear that President Barack Obama wouldn’t hesitate to ask Congress for more should that prove necessary.

It was public opposition to bank bailouts that prevented Japanese policy makers from taking more forceful action to aid the country’s financial industry in the 1990s.

Like the U.S., Japan at first responded by putting capital into the banks, in 1998 and 1999. The crisis wasn’t fully resolved until 2002, after the government forced the banks to write down or sell off bad loans and effectively nationalized one institution, according to Takeo Hoshi, dean of the School of International Relations and Pacific Studies at the University of California at San Diego.

“I find more and more similarities to Japan as the situation develops here,” he said.

Relying on Partnerships

Geithner is counting on yet-to-be launched public-private partnerships to buy up the impaired assets that remain on bank balance sheets. The partnerships will be financed by low-cost credit via the Fed and the Federal Deposit Insurance Corp.

R. Glenn Hubbard, a former chief White House economist under President George W. Bush, voiced doubts the partnerships would work and argued that more dramatic action -- and taxpayer money -- will be needed to fix the financial system.

“Some more radical solution is going to be in order,” such as dividing troubled institutions into so-called good banks and bad banks, said Hubbard, who is now dean of the Columbia University Graduate School of Business in New York.

Kenneth Rogoff, a former IMF chief economist who’s now at Harvard University in Cambridge, Massachusetts, also said he fears the administration isn’t being forceful enough. Like Japan in the 1990s, Obama has put forward a big fiscal stimulus program to try to get the economy moving again, yet may have been too cautious in acting to repair the financial system.

“If the banking plan still falls short, the fiscal stimulus will have been wasted to some extent,” Rogoff said. “We could end up like Japan, sliding in and out of recession.”

To contact the reporters on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.netRich Miller in Washington rmiller28@bloomberg.net"