Citigroup was exiled from the Dow Jones industrial average overnight as the US Federal Reserve laid down the law to 19 US banking groups with Government capital injections.
Citi’s fall from the Dow (and its replacement, Travelers Insurance, which had been part of the original Citi a few years ago), came as a surprise. The Fed’s outlining of what US banks had to do to get rid of the so-called Tarp aid surprised as well: no pussyfooting here, the various banks have to show they are strong, can stand alone, and have the management to pull that off.
The 19 banking groups have to raise the Tarp money from equity and debt markets, without any government support, have to demonstrate they can stand alone and are prudentially sound.
It won’t slow what now seems an unseemly haste to abandon the Government aid that saved all the banks from further trouble or collapse in the dying months of 2009, but it’s a welcome step from the Fed.
The companies “must successfully demonstrate access to public equity markets,” the Fed statement said. They also need to sell debt without a Federal Deposit Insurance Corp. guarantee and reduce reliance on “government capital” and the FDIC’s program.
JPMorgan Chase, the best placed of the US banks, has been lobbying hard to exit the Tarp program. It has yet to raise any capital this year, unlike Citi and Wells Fargo, but it immediately revealed plans for a $US5 billion share issue so as to be well placed when the first opportunity to leave the Tarp arrangement pops up next week.
And, American Express revealed plans for a smaller $US500 million share issue to help get rid of its $US3.9 billion in Government aid.
The share issues won’t be any concern: the bank sector on Wall Street has more than doubled in value this year and overnight markets continued to surge higher.
JP Morgan, Goldman Sachs and Morgan Stanley have asked to repay the $US45 billion in government money they received last October-November in the wake of the collapse of Lehman brothers, AIG, a number of European banks and the forced rescues of Wachovia bank and Merrill Lynch.
Nine of the 19 largest banks that were subjected to regulators’ stress tests were found not to need extra capital, while 10 were deemed to require a total of $US74.6 billion in additional money to protect against the risk of a more severe economic downturn.
The list of 10 included Bank of America Corp., with a shortfall of $US33.9 billion, Citigroup Inc. with $US5.5 billion, and Wells Fargo & Co. with $US13.7 billion. Since then the 10 banks have raised around 40% of the needed new funds in the market or in debt issues.
The nine banks that have no capital buffer requirement have revealed plans or have or raised a combined $US23.3 billion through debt or equity sales to help fund TARP repayment.