Stress Tests May Force Banks to Convert TARP Stock

By Linda Shen



U.S. banks that received results of their federal stress tests last week were given three options if they need additional capital to withstand the recession. The reality is they may only have one.

Getting federal aid or selling shares — two of the choices offered to the 19 lenders being tested — aren’t practical politically or financially, according to analysts, including Jeff Davis, the research director at Howe Barnes Hoefer & Arnett Inc. in Chicago. Lawmakers have opposed adding more to the $700 billion that the government already committed and investors have balked at buying shares of financial firms after a two-year drop. That leaves the third option presented by Treasury Secretary Timothy Geithner: changing the preferred stock held by the U.S. Troubled Asset Relief Program into common shares. Doing so would prop up capital under accounting rules and dilute the value of shareholdings for current investors. SunTrust Banks Inc., KeyCorp and Regions Financial Corp, pegged by Morgan Stanley last week as the “most likely” to need capital, dropped more than 70 percent in New York Stock Exchange composite trading during the past year. Shares of the three companies were indicated lower in Germany today. “The best most can hope for is to stay as they are and not be forced to draw down still more TARP capital or convert what they’ve got into common stock,” said Karen Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.