Government: Big Banks Are Well Capitalized

This morning, ahead of the opening bells, the Treasury Department, FDIC, office of the comptroller of the currency, the office of thrift supervision and the Federal Reserve Board issued a fairly audacious joint statement: the big banks, they say, are well capitalized, and it remains the preference of this government to leave them in private hands.  The statement comes  in the wake of news reports suggesting that the Feds are negotiating with Citigroup to take as much as 40% of a stake in the company. However...




If the stress tests show that "an additional capital buffer is warranted," the institutions, having first tried to get outside private funding, will have more access to government capital.

"This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis.  Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.  Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory.  Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares.  The conversion feature will enable institutions to maintain or enhance the quality of their capital."

Here's the kicker:

"Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.  This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy.  Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands."