Six Banks Fail Stress Test

Six banks have failed the preliminary stress test, Bloomberg says. They're now appealing. The government wants these banks to raise capital by converting preferred stock to common stock, which would stave off the need for additional capital injections. This makes sense, but debtholders should be forced to do the same thing.

At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said. While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.

By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.