US to test stability of 20 biggest banks
WASHINGTON - The Obama administration will begin taking a hard look at the financial condition of the country's 20 biggest banks this week to judge whether they could hold up even if the downturn worsens further than policy makers already expect.
These reviews of the banks' books, known as "stress tests," are heightening a dilemma for Obama aides about how candid they should be about the health of banks like
Bank shares were pummeled last week, partly out of deepening fear that the government might nationalize some of the banks. Officials consider many of the top 20 banks "too big to fail."
The tests come as anxiety is building among investors and industry analysts about the Treasury Department's broader plans to shore up the overall banking system. People familiar with the plan, which has been criticized by industry executives and analysts as vague, say its crucial details may not be ready for another few weeks.
In another sign of distress for the banks, Citigroup officials were in talks with federal regulators last night about plans for the government to take a bigger ownership stake in the bank, according to a person close to the talks.
Citigroup approached the regulators with a plan that would allow them to convert a large amount of the government's $45 billion of preferred shares, which is treated as debt, into common stock, the person said.
Converting the preferred shares while also issuing more common shares would bring Citigroup closer to the mix of equity that the government is likely to demand when it rolls out the new stress test.
But that would severely dilute the value of shares held by existing Citigroup stockholders.
Still, the big banks say they remain relatively healthy, and that with time and support from the government, they will regain their footing.
But many economists, Wall Street analysts, and even some bank executives contend that some of the banks are already effectively insolvent.
Even though banks have reported billions of dollars of losses from bad loans, these critics say, the major institutions still carry trillions of dollars in additional toxic assets and are too damaged to resume normal lending.
This camp says it would be best to nationalize some of them now - with the government wiping out shareholders and taking over the operation of some institutions, at least temporarily - rather than to drag out the process while the economy spirals further downward.
The stress tests will use computer-run "what if" situations to estimate what would happen to each bank under Depression-like conditions, with unemployment surging to 10 or 12 percent, for example, or home prices dropping 20 percent further, Treasury and Federal Reserve officials said.
