MICHELE NORRIS, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.
ROBERT SIEGEL, host:
And I'm Robert Siegel. For the rest of this week, prepare for news you can use if you own an MBA, a hedge fund, or more likely a mortgage or just a savings account at one of the nation's 19 biggest banks. It's almost time for the stress test results. A couple of months ago, the Treasury put those 19 banks on the figurative treadmill, made them run like it was an even worse recession, and tomorrow around this time we'll hear the tale of the financial EKG: who's healthy, who needs to get in shape, who has to stay on more federal TARP medication.
The banks themselves got the final word from regulators yesterday on just how much additional capital they'll be required to raise as a cushion against potential losses in a deeper downturn. Today, Bank of America said it will not comment on reports that it'll have to raise nearly $34 billion in new capital. But NPR economics correspondent John Ydstie will comment. Hi.
JOHN YDSTIE: Hi, Robert.
SIEGEL: John, your mission is to unpack and translate some of the stress test verbiage that we're going to hear so much of the rest of the week.
YDSTIE: Well, mission accepted.
SIEGEL: Okay. Let's start with - Bank of America has to raise $34 billion in new capital. Some other bank is required to raise more money in new capital. Why? Why would a bank be told you have to raise more capital?
YDSTIE: Well, the judgment of the examiners must be that under more difficult economic circumstances such as those in the stress test, which was 22 percent fall in home prices, unemployment rising above 10 percent, that Bank of America would suffer more losses and might not have enough capital, enough cushion to absorb those losses and remain viable.
We could see losses for loans to housing, which we've all heard about, but also now commercial real estate is of great concern. Credit card loans going bad as people lose their jobs. So there could be losses mounting, and they'll be bigger if the economy turns down even further.
SIEGEL: And the theory would be that if Bank of America found another $34 billion, then it could withstand that downturn with the defaults on loans that might come with it.
YDSTIE: Exactly.
SIEGEL: Okay, well, the next question is, how would they do that? And here's your next translation mission. This is what Fed Chairman Ben Bernanke said on Capitol Hill yesterday about how they would do that.
Mr. BEN BERNANKE (Fed Chairman): The extent that there are banks that need capital, our hope is that many of them will be able to raise that capital through either private equity offers, or through conversions and exchanges of existing liabilities to strengthen their capital bases.
SIEGEL: So, private equity offers selling stock.
YDSTIE: Right. Sell more stock to people. The problem with that right now, though, is the price of these stocks are quite low. You'd have to sell a lot of stock to get the money you need. And your current shareholders would be very angry because you'd be diluting their shares in the company by adding these other ones.
SIEGEL: Now, another phrase from Ben Bernanke yesterday was conversions and exchanges of existing liabilities.
YDSTIE: Well, this is where the government comes in. The government took preferred shares in these companies when it injected the TARP money into them.
SIEGEL: Preferred shares are essentially bonds, or loans to the bank.
YDSTIE: Bonds, essentially. And the government has suggested that it would allow these companies to convert those shares into common equity. That's something the government examiners are looking for right now.
SIEGEL: Now, some other possibilities - selling off assets.
YDSTIE: You could sell off some assets, loans or subsidiary companies. The problem is that the market right now isn't great, and Bank of America would probably like to hold onto those assets and sell them at a better time to get a better deal. You could also make some money. And if you made enough money, some of that could go to capital.
SIEGEL: You mean if it's a good year, generally, for the bank…
YDSTIE: Yes.
SIEGEL: …you would put away some of that money, and it would satisfy the requirements, perhaps?
YDSTIE: Right. The problem is the current situation is not great.
SIEGEL: I guess the last possibility would be to say, sign me up for the TARP again, doc, I'm still stressed out.
YDSTIE: They could do that. I think all of these banks would be reluctant to do that. That would be a horrible signal to the market. And there's not a lot of money left in the TARP, $110 billion still there. And the Treasury does not want to go back to the Congress and ask for more.
SIEGEL: Thank you, John.
YDSTIE: You're welcome, Robert.
SIEGEL: NPR economics correspondent John Ydstie. Transcript provided by NPR, Copyright NPR.
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