The government told investors Thursday what they've known since the crisis began: Some banks are healthier than others. The Federal Reserve said Bank of America Corp. needs $33.9 billion in capital; Wells Fargo & Co. needs $13.7 billion; and Citigroup Inc. needs $5.5 billion. But on JPMorgan Chase & Co.'s report card, the Fed wrote, "No need." It might as well have written "Plays well with others," too. JPMorgan so far has stayed profitable throughout the financial crisis even after absorbing two failed institutions, Bear Stearns and Washington Mutual.
The stress test results don't change the fact that all banks face one of their roughest environments ever this year. Citigroup CEO Vikram Pandit said challenges lie ahead, and that the bank's results are going to be dependent on the unemployment rate and the broader economy.
Here's a breakdown of what the stress tests say — and don't say — about the health of the banking industry.
What we learned: The banking system is recovering, but 10 of the largest 19 banks still need $75 billion to guard against losses if the recession worsens. The stress tests showed losses at the 19 banks could total $600 billion in 2009 and 2010 in a worsening economy.
What we didn't learn: What happens if the recession turns out to be worse than experts predict. The stress tests took into account two scenarios. In the first, unemployment would hit 8.8 percent in 2010 and home prices would decline by 14 percent this year. In the second, unemployment would hit 10.3 percent, and home prices would drop 22 percent. Critics say those numbers didn't go far enough.
What happens now: The banks that need more capital have until June 8 to come up with a plan to raise the additional resources and have the plan approved by their regulators. Wells Fargo and Morgan Stanley said late Thursday they will try to raise billions by offering common stock to investors.
Banks that need more capital will be given six months to raise money in the private markets. After that, the government will provide money from its $700 billion financial system bailout fund if needed.
What about bailout money?: Some of the healthiest banks are itching to return money they received under the Troubled Asset Relief Program, or TARP. One reason: They want to escape restrictions on compensation that the government imposed in return for the money. American Express Co. on Thursday became the first major financial institution to formally request permission to return TARP money. Analysts expect Goldman Sachs Group Inc.& Co. and JPMorgan Chase to follow.
Why it matters to you: If the banks are in better financial shape, that means they have more capital to lend. That helps everyone from big corporations that want to open new factories to small businesses that need to make payroll to families who are applying for mortgages.
What did investors think: Shares of many banks gained in after-hours trading. Bank of America rose $1.20, or 9 percent, to $14.71. Citigroup gained 27 cents, or 7 percent, to $4.08.
Bank of America: The nation's largest bank needs $33.9 billion. But CEO Ken Lewis says his bank's capital position is fine and that it won't need additional government money. The bank plans to sell common stock or convert privately held preferred stock into common shares. That would add about $28 billion to its base, Morgan Stanley analyst Betsy Graseck said. Other options include the sale of various businesses, such as its Columbia asset management unit.
Citigroup: Once seen as the sickest of the big banks, Citigroup can breathe a little easier. After selling 23 businesses, getting $45 billion from the government and cutting 75,000 jobs, it needs just $5.5 billion more in capital. To bridge the gap, Citigroup said it would convert preferred shares into common shares. That won't be new cash, but the move will boost the "common equity" measure regulators use to gauge financial stability. In a not-so-veiled shot at rival Bank of America, Citigroup's CEO Vikram Pandit said the stress test was "a standardized test, quite rigorous, applied to everybody," and added, "the results are what they are." Bank of America chief executive Ken Lewis said before the test results came out that his bank wasn't in the same troubled class as Citigroup.
The other big banks: Wells Fargo & Co., GMAC LLC and Morgan Stanley must raise various amounts of capital. JP Morgan Chase, Goldman Sachs Group Inc., American Express and MetLife Inc. do not.
The regional banks: Five of the largest regional banks need to raise capital: Regions Financial Corp. and Suntrust Banks Inc. in the Southeast and Fifth Third Bankcorp, KeyCorp and PNC Financial Services Group Inc. in the Midwest. U.S. Bancorp. and BB&T Corp. do not need to raise money. The biggest concern is that regional banks hold a great many commercial real estate loans, which could default if the recession deepens.
We're out of the woods: There is growing optimism that the recession is leveling off. Treasury Secretary Timothy Geithner said the stress tests results are "less acute than some had expected, in part because concern about the risk of a more severe recession have diminished." Banks have also taken steps to get their financial houses in order.
Or, maybe we're not out of the woods: Many analysts fear banks holding large amounts of commercial real estate loans will see more defaults because of the recession that could cost them billions of dollars.
The bank executive: "Clarity and transparency is always helpful in the marketplace." The stress tests "can only help in restoring confidence in the American financial system." — Citigroup CEO Vikram Pandit
The Federal Reserve chairman: "The results released today should provide considerable comfort to investors and the public." — Ben Bernanke
The Treasury Secretary: "These tests will help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario. They will provide the transparency necessary for individuals and markets to judge the strength of the banking system." — Timothy Geithner
The analyst: "Mom and pop in Iowa don't have to worry now. Their money is safe at the big commercial banks and the government has made it very clear that none of the 19 big institutions are going to fail" — Brad Hintz, investment banking analyst at Sanford C. Bernstein & Co
The critic: "The problem is that the stress test wasn't that stressful. They used a 10 percent unemployment rate as the worst-case scenario. Most people don't think that's very extreme." — Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago.