The Irish Independent reports that Ireland is suffering the worst recession of any advanced country since the 1930s, the Economic and Social Research Institute (ESRI) warns in a grim analysis of the economy.
Unemployment could rise above 500,000 as national income (GNP) is forecast to fall by 14pc over the three years from 2008 to 2010.
The fall in national income beats the 11pc decline in the Finnish crisis of 1990 to 1993, when the collapse of the Soviet Union suddenly deprived Finland of its main market.
The ESRI believes this year will be the worst of the crisis, with income per person plunging by more than 9pc in real terms.
But there will be further decline next year, with a 1.2pc fall in national income.
The stark outline comes as new figures will today show that the rate of increase in unemployment has slowed, but that 384,000 people are signing on.
The CSO statistics reveal that an additional 11,000 signed on the live register in April, pushing the unemployment rate to 11.4pc this month -- up from 11pc in March.
The Cabinet was told the latest bleak news yesterday, compounding concerns for the economy on foot of the ESRI report.
The ESRI expects a loss of 190,000 jobs this year and 103,000 next year.
Last night, ESRI senior researcher Alan Barrett said their latest prediction would bring national income"back to the level of 2004".
The ESRI forecast of a 9.2pc decline this year is twice the level it expected in its last commentary just three months ago.
"The rate of job losses in the US in the first part of the year has been extraordinary, with 3.3 million jobs shed in the last five months,"the report says.
"The forecast that Germany will contract by 5.3pc is in sharp contrast to earlier expectations that it would escape the worst of the global recession," it also says.
Dr Barrett said Ireland was suffering the steepest recession of all because its own problems came in the midst of the biggest global recession since the 1930s.
"It is frightening, the way global output falls are similar to those of the early 1930s," he said.
"Ireland is remarkably exposed to that, which all comes back to housing and the astonishing level of house building which was going on, when it reached 15pc of the economy's output (GDP).
"It was so far out of line and our hope was that it might decline in an orderly fashion. That was probably a bit of a naive hope, looking back," Dr Barrett said.
The combination of the construction bust and the global recession mean that Ireland will also match another unpleasant record -- that of unemployment.
The ESRI expects that unemployment will reach around 15pc by the end of this year, and then level off at 17pc in 2010.
Emigration
That would equal the peak of 1986, and includes estimated emigration of 60,000 over the two years.
"It would be wrong to call that a forecast. It is more of an assumption, because migration is so hard to predict."
With employment officially defined as more than one hour's work a week, the numbers on the live register could reach 500,000 on these forecasts.
The ESRI expects a loss of 190,000 jobs this year and a further 103,000 next year.
The report deliberately looks for positives among the general gloom.
It believes the two Budgets since October have begun to get a grip on the public finance crisis, even though the Government will still have to borrow €22bn this year and €20bn next year.
It says the public sector pensions levy was preferable to cutting useful public sector jobs, but Dr Barrett said more would have to be done.
"Our research suggests public sector jobs pay 20pc more than private ones, even though some price ought to be put on their job security.
"Even a 5pc fall in government wages would hardy narrow the gap, if private sector earnings also fall."
The fact that wages seem to be falling is one of the positive signs, he said.
"Restoring competitiveness is the key to recovery, although global recovery still seems just out of sight. It will be a key test of the flexibility we knew we would need when we joined the euro without sterling."
The Irish Independent also reports that almost a third of loss-making Irish Nationwide's €8.1bn commercial property loan book is classified either as impaired or in intensive care, according to the society's 2008 annual report.
The group's top 30 clients accounted for 48pc of the group's entire €10.47bn portfolio at the end of December, rising to 67pc in the UK.
Irish Nationwide was forced to clarify in the report that outgoing chief executive Michael Fingleton, who steps down tomorrow following 37 years at the helm, was the sole member of the controversial €27.6m pension pot which was transferred from the society in 2007.
Annual report
The previous annual report had referred to "members" of the scheme that was settled.
The group, which recently unveiled a net loss of €243m for 2008 after it wrote off €464m of bad loans, also gave details of the business plan to "reshape" its business model. The plan was submitted to the Government late last year after the guarantee scheme was introduced.
It plans to reduce borrowings and risk of the business by cutting its exposure to commercial property lending. Nationwide's loan book shrank 15pc last year as a result of a decline in the value of sterling and as redemptions vastly outweighed new loans.
The business plan also envisages the group improving its funding profile through securitisations of its residential and commercial loan books and increased focus on retail deposits.
Since the end of the year, the group pledged €1.2bn of residential loans to the European Central Bank in March under a securitisation programme. It received €800m in short-term loans from the bank as a result, implying it was forced to take a 33pc 'haircut', or discount to the value of the collateral to reflect its inherent risk.
The society has €2.23bn of debt maturing this year, including €1bn that falls due in less than three weeks. "The society plans to finance the repayment of the debt securities through reduction of its loan book, the securitisation of loans, as well as the issue of new notes. The ability of the society to raise new funds in the market will depend to a large extent on the state of global markets," it said.
The business plan also outlines how the group plans to strengthen management and corporate governance by appointing a chief operating officer, chief financial officer and other boardroom appointments.
It emerged this week that John McGloughlin, a financial consultant, who was formerly an executive with Citibank and Arthur Andersen, has been brought in as the group's new chief financial officer. Daniel Kitchen, who joined the board as a non-executive director late last year, was recently named as chairman. He will also take over as chief executive on an interim basis, pending the outcome of a search for a new boss.
The group, which employs 385 people, said that "while we hope that markets will be less disrupted than in 2008, the expectation is that 2009 will continue to be a difficult year for the Irish economy and the markets in which we operate".
It said that its ability to"remain a going concern and achieve its business plan is dependent on the continuation of Government support".
The report shows that loans to directors amounted to €1.38m at the end of 2008, virtually unchanged from December 2007. Mr Fingleton was the biggest borrower, with €1.3m on loan at the end of the year. Directors had €2.9bn on deposit with the society.
The Irish Times reports that there is an “implicit difficulty” with the Government’s plan for dealing with toxic assets in banks, Economic and Social Research Institute (ESRI) economist Dr Alan Barrett said yesterday.
Questioned on his views as to whether the banks should be nationalised, he told reporters at an ESRI press briefing that he was inclined towards that course of action but was “open to be persuaded” otherwise.
He said that if the National Asset Management Agency (Nama), which is being established to buy loans with a book value of up to €90 billion, acquired the loans at a discount, then that would imply an ongoing need to provide capital to the banks.
“Would it not be better to go for nationalisation straight away, as that is an end point you might end up at anyway?”
He said the fact that a concrete plan for the banks was being put in place was welcome as it worked against uncertainty. However, he said the proposal that the banks would be subjected to a levy if the taxpayer ended up at a loss as a result of the Nama process, operated to create uncertainty.
The levy “seems to me to be a flaw in the Nama arrangement” and involved an “inherent contradiction”, he said.
Prof Barrett also asked how Nama was going to be able to price the assets it would buy from the institutions, given that the price was usually set by what something was worth in the market and at present there was little by way of a market for the assets.
“It makes no sense to me . . . the idea of price is the price someone will pay . . . It isn’t clear to me how you can value these things in these circumstances,” he said.
He said his “big fear” with the Nama was that it would not bring closure to the bank issue. While there were dangers with nationalisation that the banking system would become politicised, “if you nationalised the banks you would know what structure you were in,” he said. “To a great extent, these banks are only functioning because of the State guarantee.”
The purchase of the assets from the banks would have an immediate impact on the national debt and the size of the State’s interest payments bill. Until the price that was going to be paid for the assets was known, the size of the interest payments could not be known and so this factor was not included in the quarterly commentary figures published by the ESRI.
Dr Barrett said that if the State paid €40 billion for the assets, and paid 5 per cent interest on the borrowings, that would mean an immediate increase of €2 billion annually on the State’s interest bill.
In its commentary, the institute said a comprehensive assessment of the Nama project was not possible due to the lack of detail available, but that movement towards decisive action was a positive development.
The earlier the banking issue was resolved, the better this would be in terms of providing an environment for recovery.
It also said the desirability of a speedy and comprehensive resolution would suggest that nationalisation may be the preferred option.
“Nationalisation would also ease concerns over the correct pricing of assets. However, the route is not without complications, both legal and political.”
The Irish Times also reports that a valuer appointed by the Swedish government to determine property values during the country’s banking crisis in the early 1990s says that a period of denial about problems in the market “destroys” the value of properties.
Agneta Jacobsson, managing director of DTZ estate agents in Sweden, said her country endured “a period of denial” between 1990 and 1992 before the full extent of the problems in the property and banking sectors were recognised.
“This period of denial . . . destroys the value of property because nobody cares for the problem,” she said after a business breakfast hosted by Sherry FitzGerald.
“The problem was not yet the banks at this stage. The loans were greater than 100 per cent of the properties’ value and the owners did not feel they owned them – property has to be taken care of.”
She said the state set up a valuation board in 1993 to determine property values in a move to restart activity in the market. The valuation process lasted a year and the market began to grow based on the values set by the board.
Ms Jacobsson said Swedish property values fell by between 40 and 60 per cent during the crisis. She said the Irish Government had made “a good start” with the State’s “bad bank” plan in setting up the National Asset Management Agency (Nama).
“It will take longer here to clean it up but that doesn’t mean that you can’t do good business during this period.”
She said the Swedish bad property loans amounted to a tenth of the €80-€90 billion of Irish loans to be bought by Nama. International expertise and local valuers set prices by assessing properties, including the ability of tenants to pay rents on properties in future.
“It took some time but it started from there – it created a platform and it started slowly,” she said.
She said the Swedish state’s valuation board created “a probable market” based on “best-guess” prices and valuation guidelines.
Swedish banks faced collapse in 1992 after interest rates surged and the Swedish crown fell in value, causing a property crash following a five-year lending boom.
Sweden offered to guarantee all banks and nationalised two, Nordbanken (now Nordea) and Gota.
Two “bad banks”, Securum and Retriva, were created out of Nordbanken and Gota respectively.
The bad banks were expected to operate for 10-15 years but were wound up in 1997 as the market rebounded more quickly than expected. Nama is estimated to have a lifespan of 10-15 years.
The International Monetary Fund estimated last week that the cost of stabilising the Irish banks would total 13.9 per cent of GDP, the equivalent of €24 billion. Supporting Sweden’s banks cost that state 4 per cent of its GDP.
Both the country’s bad banks made a surplus and, with the privatisation of Nordea, the Swedish government has almost recovered its total expenditure on its banks.
The Irish Examiner reports that Ryanair will wait for the Government to ask it to rescue Aer Lingus before it makes another bid for the airline.
Chief executive of Ryanair Michael O’Leary said unless that happens it will not be making a third bid for the former state airline.
Ryanair owns just under 30% of Aer Lingus shares and the company has no plans to sell this stake.
He said Aer Lingus was run by the Government and the unions, who "couldn’t boil a kettle".
Ryanair made an offer of €750 million for Aer Lingus in December but later withdrew the bid after the Government, which holds a 25% stake, rejected it.
"I think Aer Lingus is worthless. If the accountancy rules allowed us, we would write down our stake to zero," he said.
He said he believes Aer Lingus will run out of cash in the next 18 months.
Mr O’Leary also said that the swine flu outbreak is only a risk to Asians and Mexicans "living in slums".
He said travellers had little to fear from the deadly virus and predicted that a couple now being treated in Scotland for the illness after a honeymoon in Mexico was in no danger.
"It is a tragedy only for people living... in slums in Asia or Mexico," he said. "But will the honeymoon couple from Edinburgh die? No. A couple of Strepsils will do the job," he said.
Ryanair is pushing ahead with plans to close all its check-in desks at airports by next October meaning passengers will have to check-in online.
The move will save Ryanair about €50m a year and result in up to 50 job losses in Ireland.
Mr O’Leary also described the Aer Lingus revenue figures released yesterday as appalling and said "it goes to show that the board misled investors" when it promised increased profits three months ago.
Mr O’Leary was speaking in London, where he announced a new licensing agreement for websites set up to compare airline ticket prices.
Ryanair is to allow price comparison websites to access their fare information but will continue to block websites from re-selling Ryanair tickets.
Also yesterday, Aer Arann said it will implement salary reductions of an average of 7% this year.
Executive and management salaries will be reduced by an average of 17%. It said redundancies at the airline since the cost-reduction programme was introduced last October will be contained at about 60.
Initially the airline had planned on up to 100 redundancies.
Ryanair shares fell 5.5% to €3.12 yesterday.
The Financial Times reports that in a meeting hall bedecked with revolutionary slogans underneath a grubby east-Berlin subway station, radicals, communists and anarchists are plotting the downfall of the Federal Republic.
“There will be social unrest – even in Germany – I’m sure about that,”says “Peter”, face partly concealed by a baseball cap and wrap-around sunglasses and sporting a Hugo Chávez T-Shirt.“It’s important that the people organise themselves. We must take this fight to the streets.”
About 10,000 demonstrators are expected to march in the capital in May Day protests on Friday under the banner: “Capitalism means war and crisis – For the social revolution.”
Few beyond the marchers seriously expect the crisis genuinely portends the end of bourgeois democracy but many of the country’s politicians worry that its reputation has taken a pounding.
As the government unveils a dismal 2009 forecast on Wednesday that will confirm Germany is in its steepest postwar recession – it should show the economy contracting by 5-6 per cent – the main topic of conversation in Berlin is not this slump, but that of 80 years ago, which brought the Nazis to power.
Opinion polls show, in fact, that most Germans remain sanguine about the economy. A Forschungsgruppe Wahlen survey published last week showed 32 per cent fearing for their jobs but 45 per cent saying they were yet to be affected by the downturn.
Yet Gesine Schwan, the Social Democratic candidate for the presidency, sees the Republic coming under threat. “I could imagine people’s anger boiling over in two or three months,” Prof Schwan, a political scientist, said last week.
Michael Sommer, head of the DGB trade union federation, recently warned that a sharp rise in unemployment could cause “social unrest”. This week’s Spiegel news magazine asked:“World crisis 1929/2009: Is history repeating itself after all?”
Comparisons between this downturn and the great recession are platitudes in other countries. But in Germany, such analogies are controversial owing to the rise of Nazism in the 1920s and 1930s. Asked about Prof Schwan’s comments, Angela Merkel, chancellor, erupted at the weekend. “It is highly irresponsible to stoke fears and panic and predict things that have nothing to do with reality,” she said.
Werner Abelshauser, professor of economic history at Bielefeld University acknowledges that: “The 1930s still play a big role in German politics. A postwar German politician’s nightmare is to go to bed and wake up in the Weimar Republic.”
Indeed, Ms Merkel’s crisis-management has been informed by the episode of the 1930s. Last week, Peer Steinbrück, finance minister, justified Berlin’s decision, last autumn, to guarantee private deposits with the fact that Germany was not “an old, established democracy like Britain” and could not afford a bank run.
Such angst contrasts with the relative insouciance of most Germans. From Berlin to Munich, life seems to go on as usual.
Leftwing parties are fuelling fears of unrest linked to growing unemployment, which is expected to rise to near 5m next year. “We will see another German federal republic in a few months time [compared with] the one we have right now. There will be lots of massive protests on the streets,” says Ulrich Maurer, chief whip of the radical Left party.
Historians admit there are some similarities between the early 1930s and today. The near-failure and subsequent bail-out of lender Hypo Real Estate is reminiscent of the Danat bank collapse of May 1931.
But they insist the political situation could not be more different. Neither the far-right NPD nor the Left party are a match for the Nazis or the Communist party. “By 1932, half the seats in the Reichstag were occupied by anti-Weimar parties,” says Prof Abelshauser. “Compared to these people, today’s protest politicians are altar boys.”
Adam Tooze, a Cambridge historian and author of an economic history of the Third Reich, says: “You don’t have today the political structures of mobilisation you had in the 1930s.”
This year’s May Day protests may bring more than their usual share of random destruction, but the Reichstag is not quite burning yet.
The FT also reports that Citigroup has told US regulators it could fill the capital shortfall identified in the government’s “stress test” by selling large businesses, asking more investors to convert their preferred shares into common stock and reducing its balance sheet.
Executives are trying to persuade the government Citi does not need more capital beyond its recent plans to bolster its battered balance sheet and cut costs.
However, with days to go before the results of the tests are announced, Citi, which has been bailed out three times by the authorities, is looking for ways to avoid receiving more government help if the authorities insist on an increase in capital.
Bank of America, another lender whose test has highlighted the need for funds, is in talks with regulators over its needs and the possibility of converting the government’s preferred shares into common stock, bankers said. Analysts have estimated BofA could require up to $70bn in extra capital.
Citi executives argue that divestitures, such as the planned $5.2bn sale of Japan’s Nikko Cordial to Sumitomo Mitsui, the possible expansion of an existing conversion offer, and cost-cutting would ensure it has enough capital to withstand the crisis.
People close to the situation said Citi could sell several units in Citi Holdings, the division that holds its non-core activities. Citi executives do not rule out shedding businesses deemed as core but argue that, if the company has to raise capital, the first option is to accelerate plans to sell unwanted businesses.
Citi has also looked at adding to its planned conversion of $52bn of preferred shares held by the government and other investors by including trust-preferred shares, although that idea was losing ground last night. Some insiders argue it could be difficult to persuade holders of such shares – a hybrid of debt and equity – to exchange them for common stock because they rank as debt and pay interest.
People close to the situation said both Citi and BofA were contesting some of the conclusions made in the stress tests. Citi executives, led by finance chief Ned Kelly, are believed to have told regulators the estimates for losses on credit cards – based on rising unemployment – are too high.
Citi is also asking regulators to take into account the capital boost it will receive from the expected sale of a majority stake in its brokerage unit Smith Barney to Morgan Stanley as well as the likely disposal of Nikko.
That deal is expected to generate an accounting loss, because Citi’s acquisition price for the business is higher than the likely sale price but it would still result in a cash boost for Citi.
People close to the situation cautioned that discussions between Citi, Treasury and the Federal Reserve were fluid and details of the plans could change ahead of the release of the results of the stress tests next week.
Some Citi executives believe the government may still have to convert more of its preferred shares into common stock, raising its holding above the 36 per cent it is due to take following the latest bail-out in February.
Citi shares closed down 5.9 per cent. BofA shares closed down 8.6 per cent at $8.15.
BofA declined to comment. Citi said its capital base was “strong”.
The New York Times reports that Phoenix has achieved the unwelcome distinction of becoming the first major American city where home prices have fallen in half since the market peaked in the middle of the decade, according to data released Tuesday.
Though historical statistics are scant, experts said the precipitous decline probably had few if any equals in modern times.
“Even during the Depression, I’m not sure prices fell this quickly,”said Karl Guntermann, a professor of real estate at Arizona State University.
Greg Swann, a Phoenix real estate agent, took a moment to marvel at the news. “What happened here will some day be a new chapter in ‘Extraordinary Popular Delusions and the Madness of Crowds,’ ” the classic survey of investing mania, he said. “We were living during the boom like there was no tomorrow. And guess what? Now it’s tomorrow.”
Home prices in the Sun Belt city, the 12th-largest metropolitan area in the United States, dropped 4.5 percent in February, according to the Standard & Poor’s Case-Shiller Home Price Index. Prices in Phoenix are now down 50.8 percent since the market peaked in June 2006.
For the country as a whole, the Case-Shiller numbers offered the thinnest of silver linings: things are still getting worse, but more slowly.
In February, the price of single-family homes in 20 major metropolitan areas fell 18.6 percent from the year earlier, compared with a record drop of 19 percent in January.
“Finally, we’re seeing a touch of moderation,” said David Blitzer, chairman of S.& P.’s index committee. “This is the kind of thing one might see if we’re beginning to see a bottom. I would not run out and celebrate, but I would not dig the bunker any deeper.”
Mr. Blitzer said the decline in Phoenix outpaced any during the recession of the early 1990s, for which reliable figures are available. The only precedents he could cite were the Midwestern cities hit by the Great Depression and a contemporaneous drought, and Miami after a 1920s craze for beachfront property reversed itself.
The boom in Phoenix was founded on a basic truth: it was a place where many people wanted to live. But the market turned irrational. Investors bought homes they did not even bother to rent out. They merely waited a few months until prices rose again so they could flip them.
Ordinary homeowners got caught up, too. “People saw themselves as cashing in on a once-in-a-lifetime opportunity,” Mr. Guntermann said.
Except for the few who managed to get out at the peak, it was a mistake. By now, anyone who bought in Phoenix a decade ago would have lost money after inflation. Many did not get off so easily. Foreclosure notices were filed against one in 40 houses in the metropolitan area in the first quarter, according to RealtyTrac Inc. That was the ninth-highest rate in the country.
The Case-Shiller data show that housing markets across the United States are still suffering. Half of the 20 metropolitan areas in the index posted record year-over-year declines. In all, the 20-city index was down 2.2 percent from January.
From Atlanta to San Francisco to Chicago, not one of the 20 cities posted a gain in home prices from January to February, and values in all but five cities dropped by double digits from a year earlier.
The nearly 51 percent drop in Phoenix is not an isolated plunge. Prices in Las Vegas are down some 48 percent from their peaks. They are down 45 percent in Miami from their highest levels, and down 40 percent in Los Angeles and San Diego.
Economists said housing prices would probably continue to fall as Americans, worried about rising unemployment and the recession, put off big financial decisions like buying a home.
Some economists expect housing prices to fall another 5 to 10 percent before they hit a bottom; others say that prices could decline by as much as a third. According to the National Association of Realtors, the median price of a home in the United States, which peaked above $230,000 in 2006, has fallen to $175,200.
As prices have dropped, frozen housing markets in hard-hit areas like Southern California, Phoenix, Las Vegas and South Florida have begun to thaw. Record-low mortgage rates and huge inventories of foreclosed homes and other fire-sale properties have enticed first-time buyers to the market and lured others who had been sitting on the sidelines.
Home sales in Southern California and the San Francisco Bay area, where foreclosures dominate many markets, have snapped back this spring as prices dropped. But sales have slowed to a crawl in other markets like New York City, where prices declined 10 percent from a year ago.
“We’re seeing very strong sales in a few states and weak sales across 40 states,”said Patrick Newport, United States economist at IHS Global Insight.“The key factor driving them right now is just the excess inventory. Even though prices are undervalued, they’re still going to drop because of the excess. Even if we were at full employment we’d still see prices dropping.”
Inventories of unsold homes are edging down slightly, but there was still a glut of 3.7 million unsold homes in March, the Realtors’ group reported, representing a supply of nearly 10 months.
Mr. Swan, the realty agent, said inventories of lower-priced homes were already dwindling in Phoenix as investors snapped up bank-owned properties at bargain prices.
“I’ve got Canadians coming here who are putting together investment pools of millions of dollars to buy houses by the hundreds,”he said.“They’re going to rent them out to all the people who were foreclosed and need a place to live. This is going to be a good year for us.”
The NYT also reports that as Washington pushes banks to mend their finances, the banks are pushing back.
Emboldened by newfound profits and eager to shake off federal control, a growing number of banks are resisting the Obama administration’s proposals for fixing the financial system. Lenders that skirted disaster only months ago with the help of taxpayer dollars are now balking at government prescriptions.
Despite pressure from federal regulators, industry executives are taking issue with major elements of the president’s bank plan. Administration officials characterize each part of their three-pronged approach as crucial to bolstering banks and restarting the economy. But bankers are increasingly eager to extricate themselves from the government’s grasp, and worry that Washington will impose new restrictions on their businesses if the government’s already considerable role in the industry grows.
“The pushback has been pretty hard,”said Frederick Cannon, the chief equity strategist of Keefe, Bruyette & Woods and a specialist in banking stocks.“If we don’t address these issues, that could have a negative effect on economic growth, which in turn makes the banks’ problems worse.”
As the Obama administration marks its first 100 days, the banks’ resistance is complicating the government’s effort to solve some of the thorniest problems of the financial crisis. Opposition is building on several fronts.
Citigroup, Bank of America and other big banks are disputing so-called stress tests being conducted by federal examiners to determine how these institutions would withstand a deep, prolonged recession. The banks contend they are in better shape than the early findings suggest, although it is likely several will need to raise capital.
A Treasury plan to purge banks of their troublesome assets — a seemingly intractable problem — has received a lukewarm response in banking circles. Several big banks have declared they have no intention of participating in the program. Another major effort, one to revive credit for everything from car loans to equipment leases, has also gotten off to a slow start.
Administration officials said Tuesday that their efforts were going according to plan. They said that more than 100 private money managers had signed up for the program to buy troubled assets. “We are not flipping a switch here,” said one official, calling for patience. “These are intricate programs.”
But the disputes over the stress tests, which have been administered to 19 big banks, and a lackluster reception to the third effort, the Term Asset-Backed Securities Loan Facility, or TALF, are also potential worries.
Large banks are being put through a battery of tests to see whether they will hold up under pressure in the worst-case economic assumptions over the next two years. Big banks like Citigroup, Bank of America, PNC Financial and Wells Fargo are disputing some of the early findings, which suggest some banks may need to raise capital, according to people briefed on the exams. Because of the protracted negotiations with the banks and regulator infighting over how much information to disclose, officials now plan to announce the results on May 5 or 6, the third time the date has been postponed.
“There is concern among the banks that the stress test has led to uncertainty, the opposite of what is intended, and they would be diluting their shareholders based on a scenario that the regulators say themselves are unlikely to happen,”said Edward L. Yingling, the head of the American Bankers Association.
According to people briefed on the situation, the disputes center on several assumptions that regulators made in administering the tests. These include the severity of losses on assets like mortgages, credit card loans and commercial real estate loans, as well as the banks’ potential to generate earnings.
In a further challenge, the banks are also pushing regulators to relax the timetable for them to obtain new capital.
Some investors are prepared to buy problem assets from banks. What is less certain is whether banks will be willing to sell. Big money managers like BlackRock and Bank of New York Mellon said they had applied to raise money for the troubled-asset funds. While administration officials say they never expected every bank to participate, large banks whose involvement was regarded as vital to the plan’s success have said they will not be involved. Executives worry that whatever assurances the White House gives them, an angry Congress might impose new rules on banks that participate, particularly on pay.
Officials from Citigroup, Morgan Stanley, PNC Financial and a number of other big lenders that have received multibillion-dollar government bailouts are reluctant to participate or have refused so far to commit until more details are offered. Jamie Dimon, JPMorgan Chase’s chief executive, has said he believes that the Public-Private Investment Program — which depends on loans from the Federal Deposit Insurance Corporation — could be “good for the system” but that his bank has no intention of being either a seller or buyer. “We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that,” he said earlier this month in a conference about earnings.
Many banks are reluctant to sell their nonperforming loans because they could suffer big losses, forcing them to raise more capital. Others want to avoid the stigma of latching on to another federal program.
“Never mind the price,”James E. Rohr, PNC’s chief, said in a recent interview. “I wouldn’t want to be the first person and be perceived as a weak bank.”
D. Bryan Jordan, the chief executive of First Horizon, a big lender based in Tennessee, said the likelihood that his bank would participate was somewhat low. “We think we can get a lot more value out of them by working them out ourselves,” he said earlier this month in a conference call about first-quarter results.
Art Murton, an official at the F.D.I.C. who is helping to devise the troubled-loan program, said there had been “encouraging” levels of interest. To test the investor waters, the F.D.I.C. is planning a pilot auction in June.
The TALF program has also struck some as underwhelming. It was to ignite the market for securities backed by consumer and small-business loans, which dried up last year.
Policy makers said they planned to lend up to $1 trillion under the program. But investors took only $4.7 billion in loans in the first installment in March, and a further $1.7 billion in April, according to the Federal Reserve Bank of New York. Administration officials said, however, that the plan was restarting lending and would grow in coming months.
Citigroup, meanwhile, has been in discussions with the Treasury over overhauling its compensation system for traders and other employees, a person close to the talks said, as the bank awaits the government’s new compensation rules. Among the ideas discussed have been issuing warrants, permitting employees to buy stock rights at steep discounts and exempting traders from the new rules.
