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.

The International Monetary Fund (IMF) is now considering selling its bonds to developing countries in order to raise sufficient capital against the worldwide economic crisis. Brazil and China are among the countries that showed interest in purchasing the securities. The tentative offer opens new doors in the way member states can contribute to the fund. The IMF, through all its years of history, has never issued bonds before.

Essentially, the fund is looking for ways to finance loans and provide aid to members during the worst-economic crisis in its history. With more uncertainties ahead, the institution is tapping into its 185 members for fresh cash infusions. However, developing countries have suggested that they want more decision-making authority within the IMF; this sets up a possible clash with developed countries in the future.

Is the Bond Issue Likely to Push Through?

According to Dominique Strauss-Kahn, “I’m sure that this vehicle will be used…we’re discussing with different creditors the way to implement it and the amount that we put in it.” He further added that bonds provide flexibility. Despite the prospects of the IMF bond issue, Brazilian Finance Minister Guido Mantega has said that the sale proposal is premature.

Brazil is demanding higher yields compared to those attached to US Treasuries before they will buy. Mantega has met with his counterparts from China, India, and Russia to discuss the situation. Contributions made by the four largest developing countries are “provisional”. That is, they want to increase their decision-making power in the IMF.

What does it mean to both Rich and Emerging Economies?

If the bond issue really pushes through, it is inevitable for emerging economies especially the four largest developing nations mentioned earlier to attain more decision-making power within the IMF. Right now, Mantega has revealed that they want their contribution to help developing countries weather the global financial slump instead of strengthening the “current structure of the fund”.

There was an implicit suggestion made by Bank of France Governor Christian Noyer that the IMF should forget this kind of “exercise”. But everyone agrees that the fund needs to be correctly capitalized in order to be operational. Though the next move of the IMF is unclear, the common aspect everyone agrees on is that institutions like the IMF and the World Bank need to contain the crisis that seems to be worse than what was previously projected.

Although the government has previously said that distressed banks need to raise additional capital to meet the strict standards of the “stress tests”, the Obama administration also revealed that it is ready to provide help if the banks needed it. Performed on 19 financial firms, the stress test is intended to boost consumer confidence. It is important to take note that the 19 major firms account for half the loans in the United States banking system and it has become a big part in the government’s rescue plan.

Restoring Consumer Confidence

With today’s economic crisis, you, your friends, and your loved ones might be cutting back to save up for any unforeseen circumstance. This causes great damage to the economy if majority of Americans are doing the same thing. The government wants to stop this trend by assuring the public about the relative strength of the financial sector. Once investors and the public are assured that the country’s biggest financial firms are stable, recovery can begin at a faster pace.

The Federal Reserve has already held top-level meetings with bank executives to give them the lowdown about what the status of certain banks will be if the recession got any worse. Senior Fed officials assured the public that they will keep a close eye on banking institutions to ensure that they have sufficient capital to withstand major economic shocks. The results of the stress test will be announced on May 4. Already, its effects are being felt in a positive way. Wall Street is brimming with anticipation and the Dow Jones Industrial rose by 119 points to close at 8,076.

Criticism of the Stress Test

The concept of the stress test has garnered both praise and criticisms from economic experts. Some critics maintained that the stress test may achieve the opposite effect of what the government wanted. The uncertainty that it creates feels on market volatility. In addition, the market may not accept the hypothetical testing as a realistic one.

How the Government Will Help

The philosophy that major financial firms are “too big to fail” seems to be a fundamental one. The Fed can use several tools to improve a bank’s balance sheet including converting Treasury loans into the bank’s common shares of stocks. Another method would be to compel financial institutions to raise more capital from private market to get more money from the bailout fund. If worse comes to worse, the rescue plan may involve a government-backed merger.

This past Thursday, Wells Fargo released a surprising first quarter earning report that displayed profits, mirroring what Citi Financial profit reports stated a few weeks ago.  Stocks of Wells Fargo surged to their highest level in 2 months, shooting way past the expectations of financial analysts.  More specifically, Wells Fargo reported that it expects earnings of approximately $3 billion for its first quarter; The Dow rose 246.27, or 3.1 percent, on Thursday to 8,083.38.  According to information released on Forbes.com, “the profit forecast of 55 cents a share is more than double the Street’s consensus estimate.”

You may be wondering how Wells Fargo doing so well amidst the recent credit crisis that America faces?  They have stated that acquiring Wachovia has achieved better results than previously anticipated.  Wachovia has contributed approximately 40 percent of its total revenue, which comes to $20 billion.  Many believe this may be a sign of better times to come for the banking industry, which means better times to come for the people of America.

Wells Fargo’s CEO, John Stumpf, commented that “Our business momentum is strong, and we expect our operating margins to remain at the top of our peer group.”

These profits have sent waves of encouragement throughout Wall Street during an otherwise relatively quiet week; this type of positive news has been rare during these tough economic times.   The hope is that Wells Fargo’s success this first quarter will spill over to other banks as well.  Furthermore, The New York Times reported that all 19 banks would pass federal regulators’ ongoing “stress tests”; the objective of this government-imposed test is to estimate how banks would hold up if the economy were to crash even further.

So what does this mean for consumers with regard to loan financing options?  Wells Fargo earned good fees; simultaneously, low interest rates drove 450,000 customers to either purchase new homes or to refinance existing loans.  Doing so has successfully lowered people’s monthly payments.  As a result of the Wachovia acquisition, along with an increase in the number of mortgage applications, the low amount of borrowing activity is likely to increase.

Furthermore, The Federal Reserve has helped reduce mortgage interest rates by buying lots of the Fannie and Freddie-backed loans packages.  President Obama echoed the widespread enthusiasm, stating that “A lot more people can take advantage” of the refinancing program.  He also urged Americans to find out if they are eligible at the website www.makinghomeaffordable.gov