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Leave aside the bickering whether Thursday’s stress test results solve the long-term problems facing America’s financial sector. For the ten banks informed by the Treasury that they need to raise more capital, scouring the globe to find it is now the challenge.
The two most important issues for investors relate to size and process. For starters, the aggregate amount of capital that needs to come from private sources is a moving feast. In addition to the $75bn total shortfall calculated by the Treasury, the amount also depends on the proportion of troubled asset relief programme funds the healthier banks wish to repay, as well as the value of potential asset sales.
Assuming strong banks initially want to pay back half their Tarp capital, while weaker banks raise their tangible common equity to risk-weighted asset ratios to between 4 and 5 per cent, Goldman Sachs reckons about $130bn of additional capital is needed. Converting all private preferred shares into common stock raises about $45bn. Asset sales could net up to $30bn.
That leaves roughly $55bn of new private equity to be raised in the next six months – assuming banks fearful of meddling are hell-bent on not converting their government preferred shares. Finding that kind of money will be tricky considering the sum is almost three times total US equity capital raisings during the last half a year, according to Dealogic data.
Nor will the process of 10 (or more) banks running to the market all at once be smooth: Morgan Stanley, which actually passed the test, and Wells Fargo are already out of the blocks. As forced sellers, institutional fund managers, for example, will be able to play banks off against each other. “You’re giving me a 7 per cent discount? The bank in here this morning offered 12 per cent.” The tests are over; not so the stresses.