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Stress Test Results Officially Announced

After weeks of speculations and leakage, it is finally confirmed: some of the nation’s largest banks need additional capital. Federal regulators finally announced last May 7 that 10 out of the 19 banks that underwent the stress test “failed” it.

Leading the pack is Bank of America which needs an additional $33.5 billion. Meanwhile, Wells Fargo needs $13.7 and it is closely followed by GMAC LLC which needs $11.5 billion. Citigroup and Morgan Stanley need $5.5 billion and $1.8 billion respectively. Among the banks that were given a clean bill of health are JP Morgan Chase, Goldman Sachs, US Bancorp, Bank of NY Mellon, and MetLife.

In spite of the vulnerable state the banks are still in, the government is confident about the financial industry. The Obama administration believes that even if the banks are not totally out of the woods yet, it is fast getting there. Almost half of the banks that have taken the stress test passed them. Even those that didn’t were actually in better financial shape that people originally thought.

Fed Chairman Ben Bernanke expected the report to restore investor confidence. And indeed, his projection proved to be accurate. Markets have improved steadily since the results were announced with rising share prices, better liquidity, and other signs of a stabilizing market. Regulators were also happy that capital marketers were willing to fill in the holes the stress test revealed at the banks.

The stress test showed that some of the major banks required a $74.6 worth of additional capital to ensure that they can withstand worst-case scenarios. Both Morgan Stanley and Wells Fargo sold over $15 billion worth of bonds and shares the following day. On the other hand, Bank of America said that it planned to sell 1.25 billion shares when they saw that investors were positive about their relatively small shortfall.

The Obama administration is pleased with this development. This is because if the banks are able to raise the necessary capital halfway by next week, the administration would not need to ask Congress for more bailout money.

5 Savings Tips From Sites We Like

With today’s economic crisis, it is important for everyone to cut cost where they can, whether in business or in their personal life. Saving money for yourself and for your family is actually simpler than you think. For this week’s roundup, we compiled a list of blogs that might help you save money on everyday expenses.

Jaimie Paynter @ Bargaineering introduced the idea of using allowance as a budgeting tool in the post “Do You Need An Adult Allowance?” Essentially, it takes the idea of “budgeting” one step further because everyone is familiar with the idea of allowance since childhood. Someone in authority controlled our spending. As an adult though, using allowance don’t need to be controlling. Rather, it can actually free from your financial burden when used property.

David @ My Two Dollars wrote a post titled “If You Don’t Need It, It’s Not a Bargain At All“. From this headline alone, readers will have a pretty good idea about what this post is about. It talks about how customers are usually encouraged to spend simply because “deals” are being offered in the market especially during hyped-up occasions.

J.D. @ Get Rich Slowly recently uploaded a blog post “How I Cut My Television Bill in Half“. Here, he provides some alternatives to cable television. Deluxe cable packages can cost a significant amount. But if customers know about other options that deliver the same kind of service, they can reduce their bills dramatically. J.D. gives viewers some choices such as buying shows from iTunes store and watching shows for free in Hulu.

Trent @ The Simple Dollar wrote an interesting post “Buying Fresh, Buying Cheap“. The blog post outlines the different ways a consumer can save money from buying fresh fruits and fresh meat. Usually, most people instantly assume that fresh is more expensive compared to canned goods. Trent reveals tht this isn’t necessarily the case when you know how to look for bargains.

The My Dollar Plan Blog consulted with newly-retired IRS officials about tax deductions from gas mileage in the post “Tax Savings: How to Deduct Tax Mileage on Your Personal Car“. With the kind of economy today, it is important to cut costs where you can, tax mileage included. This blog post shows how a car-owner can save money from using his car for business purposes.

Fed Ties to Banks Incite Calls for Change

It recently came out that the directors of 12 regional Federal Reserve Banks have ties with privately held financial institutions and banks. They are either board members or have significant shares in these institutions. This revelation has incited calls to overhaul the policies of the banking establishments as a whole. On Monday, the Wall Street Journal outlined how Stephen Friedman, a Goldman Sachs Group director and the chairman of the New York Federal Reserve, was allowed to hold both positions even after Goldman Sachs became a Fed-regulated bank last September.

Following the revelation, the New York Federal Reserve has faced a lot of criticisms on its corporate-governance practices. Other regional Federal Reserve Banks including those from Dallas and Kansas City had said they wouldn’t have permitted this type of situation to occur.

According to Cam Fine, the chief executive of the Independent Community Bankers in America, no regional Federal Reserve director should be allowed to have connections with a regulated financial establishment. He added that this “should be a very bright line”. The New York Fed is particularly important because a number of the nation’s largest financial institutions are found in New York.

When the Federal Reserve was formed in 1913 by Congress, it required the 12 regional banks to have nine board members. Three will be appointed by the Fed Board in Washington while six will be elected by the local banks. The regional banks are tasked to give recommendations about the Fed’s discount rate and other matters to the Washington office.

Under its rules, three Class C directors, such as Stephen Friedman cannot hold positions at banks that are regulated by the Federal Reserve. But lawyers sought a way around by asking for a waiver of the Fed policy. This allowed Mr. Friedman to continue his role as Fed chairman even as he held on to a large Goldman Sachs stock at the same time.

The Minneapolis Federal Reserve chairman also asked for a similar waiver. John Marvin, the chairman there, holds shares on both Morgan Stanley and Goldman Sachs. There is good news though. Other regional Fed banks have announced they wouldn’t permit such maneuvers. The Dallas Federal Reserve Bank has asked chief executive Myron Ullman to resign from his Pzena Investment Management position before he was allowed into the Fed board.

Washington Fed officials are responding to the call for more transparency. On Tuesday, Ben Bernanke has announced that more details will be revealed about its borrowers. Currently, it is also reviewing the rules for its regional bank directors in the hope that conflicts can be avoided in the future.

Still Unofficial: Citigroup Failed the Stress Test

Citigroup Failed the Stress Test

Making financial news headlines is the still-unofficial results of the stress test. Apparently, Citigroup may need to raise as much as $10 billion in capital in order to comply with the new standards. However, in an interview with the Wall Street Journal, the bank had argued that this may not be necessary. In fact, Citibank is currently conducting its own analysis and is expecting to find that it already has $500 million as capital safety net. But it was reported that because of Citi’s objections, the findings of the bank stress test will be delayed to May 7 which is three days later than the supposed announcement date.

Citigroup Trying to Raise Additional Cash

It is expected that Citigroup may try to get additional capital from private investors instead of the government bailout money. The New-York based bank was already given $52 billion on rescue funds last year. Under the current plan, the government can convert $25 billion of its stake for a 36 percent voting interest. If it decides to convert the remaining $27 billion, Citigroup will need to cede control. This is a scenario no one wants to ponder for the once biggest US bank.

One solution that is being pointed out is to convert $10 billion privately-held securities. It will be added to the pending exchange to bring Citigroup over the threshold required by the Federal Reserve. Other plans include selling “non-core” business such as the Nikko Cordial Securities and the Smith Barney brokerage to free up capital.

How the Stress Test Will Affect the Future Intervention

The government has previously revealed that it will not allow any of the 19 biggest banks that underwent the stress test to collapse. Those that are found to require additional capital, but are unable to acquire it, may be given additional loans. Later, the administration will reveal what “type of investor it will be in companies where it has a stake” according to the Journal.

Undeniably, the results of the stress test will be felt in the entire financial industry. It will play a big role in determining future government intervention in the financial system. After the results are announced, the banks will be given 30 days to present a plan to the government and six months to implement it.

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