Washington Anxiety is growing again over the health of the nation’s largest banks, and with Congress hesitant to commit more money, the Obama administration is exploring ways to strengthen them in the face of an unrelenting recession.
Results of the federal government’s “stress tests” on big banks are due May 4, and Wall Street is increasingly worried they will show some banks are in worse shape than expected.
The renewed bank fears drove the stock market down on Monday in its worst showing in six weeks. Bank of America stock lost nearly a quarter of its value, and the Dow Jones industrial average fell almost 290 points.
Bank of America reported a first-quarter profit of $2.8 billion, joining other banks whose earnings reports have looked positive at first blush. But some analysts say accounting steps are concealing the depth of the financial industry’s woes.
The banks have been helped by income from trading and cheap borrowing, but they are still struggling with bad debt, said Joe Saluzzi, co-head of equity trading at Themis Trading LLC.
Investors are “looking at bank numbers and are saying they are not that great,” he said.
Among the ideas being explored by the administration is converting the government’s loans into equity stakes, which would improve the banks’ bottom lines by increasing their capital reserves.
The Treasury Department will outline Friday how it plans to structure the stress tests, which aim to gauge the health of 19 big banks. So far, investors have been too optimistic about the results, warned Jaret Seiberg, a financial services policy analyst at Washington Research Group.
“What we’re seeing is a re-evaluation of those positions,” he said. “Until we have finality on what the stress tests will tell us, the markets will be very jittery about the banks.”
The $700 billion in bailout money approved by Congress last fall has dwindled to about $135 billion, and the administration is under pressure to show it has other tools to strengthen weaker banks.
Critics have complained that the bailout money has failed to get banks to resume more normal lending to consumers and businesses. Increased lending is seen as vital to ending the financial crisis.
Congress has signaled that additional money is unlikely, in part because of public outrage over executive bonuses at banks getting taxpayer money.