However, the two largest recipients of TARP money – Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) – have yet to pay back their loans and the government is still exposed to possible losses from those two heavyweights, as well as from smaller U.S. banks.

The government netted roughly $4 billion – the equivalent of a 15% annual return – from  eight of the biggest banks that have fully repaid their obligations to the government, according to calculations by The New York Times.

Those financial institutions consist of:

• Goldman Sachs Group Inc. (NYSE: GS) – $1.4 billion in profit.
• Morgan Stanley (NYSE: MS) – $1.3 billion in profit.
• American Express Co. (NYSE: AXP) – $414 million in profit.
• Northern Trust Corp. (NYSE: NTRS), The Bank of New York Mellon Corp. (NYSE: BK),    State Street Corp. (NYSE: STT), U.S. Bancorp (NYSE: USB) and BB&T Corp. (NYSE: BBT) – $100 million to $334 million in profit.
• Fourteen smaller banks that have repaid their debt – $35 million in profit.

JPMorgan Chase & Co. (NYSE: JPM) and Capital One Financial Corp. (NYSE: COF) could yield an additional profit of more than $3.1 billion in the coming month, but the final number is dependent on how much they will pay to buy back their warrants, The Times said.

Additionally, the U.S. Federal Reserve earned $16.4 billion through the first six months of the year, thanks to a range of rescue programs – including loans to investment banks and purchases of mortgage-backed securities – while the Federal Deposit Insurance Corp. (FDIC) saw a profit of more than $7 billion on the fees it charged through a program that guaranteed debt issued by banks. Still, the FDIC has agreed to assume most of the risk on $80 billion in loans and other assets, and expects to eventually have to cover $14 billion in future losses on deals cut so far, according to The Wall Street Journal.

“Taxpayers should heave a sigh of relief that the investment in banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the New York University’s Stern School of Business.

The government said last year that its decision to purchase preferred shares from hundreds of banks ravaged by mortgage defaults would yield a positive return, including a 5% quarterly dividend and warrants to buy stock in the banks at a set price over 10 years.

As many banks stanched their losses and began to turn a profit, the government authorized them to buy back the preferred stock, make the dividend payments for each quarter since October. Banks also were permitted to buy back the warrants, which had a low fixed price – and which provided therefore provided a windfall for the government as the markets rallied.

The U.S. should consider imposing an automatic ban on dividend payments by lenders when “the bank stock price plummets and the banks aren’t doing well,” New York Federal Reserve Chairman William Dudley told CNBC, expressing concern over how the payouts could end up dissipating the banks’ capital.

Should a bank lose capital because of a falling stock price, it could raise more capital by issuing debt that is convertible, Dudley said.

Had private investors taken matching stakes in the banks in October, they would have tripled their investment to roughly $12 billion, or 44% on an annual basis, according to University of Louisiana at Lafayette finance professor Linus Wilson, who analyzed the data for The Times. But there’s a good reason for that. Under this hypothetical scenario, the private investors would have demanded a higher rate of return, bought in at a lower price, or both – because of the high risk that they would have been incurring.

But the government wasn’t in this to make a profit – it was working to stabilize a financial system that was quickly losing the public’s confidence, experts note.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions, told The Times.

Threat Posed by Loss-Shares

Despite the encouraging news that taxpayers are getting strong returns on their reluctant investments, the loan guarantees invested in the two largest TARP recipients – Citigroup and Bank of America – have not yet been repaid. Citi received $50 billion in TARP funds, while BofA got $45 billion.

In the last month, Citigroup has seen its stock surge roughly 58%, along with a 19% return in the shares of BofA, which leaves the U.S. government sitting on a combined $18 billion of profits from the warrants it purchased last year.

Those banks also hold troubled mortgages and other loans that no one can put a value on – which is why these so-called “toxic assets” have yet to attract buyers.

“No one has a good handle how much is out there,” Elizabeth Warren, the chairman of the Congressional Oversight Panel who acts as the so-called “TARP watchdog,” told Reuters Television in an interview last month. “Here we are 10 months into this crisis…and we can’t tell you what the dollar value is.”

More than 50 deals brokered by the FDIC to absorb losses at small banks affected by the financial crisis still remain in place. These agreements to assume the risk of loans and other assets from the consolidation of failed banks are known as “loss-shares,” and are an important inducement for healthy banks to take over busted institutions.

The FDIC brokered the sale of Alabama’s Colonial BancGroup Inc.’s (OTC: CBCGQ) deposits to BB&T after Colonial failed. It also agreed to help BB&T buy Colonial’s $15 billion portfolio of loans and other assets and absorb over 80% of any future losses. Under the deal, BB&T’s losses are capped at $500 million and – in the unlikely event the entire portfolio becomes worthless – the FDIC is on the hook to cover the rest.

The FDIC sees these deals as a way to keep loans and other assets in the private sector, as well as mitigate the cost of cleaning up the industry.

It would cost the FDIC considerably more to simply liquidate the assets of failed banks, especially with more than 400 banks on its “problem list.” Loss-share deals will cost $11 billion less than if the agency seized assets and sold them, The Journal said, citing the FDIC.

So far this year, 109 banks have failed – quadruple the amount of failures in 2008. The FDIC’s recouping any lost money from the loss-share deals, many of which are in place for up to 10 years, is dependent on the recovery of the economy

Some worry that bankers may tire of the partnerships with the FDIC and not work toward fixing bad loans because the bulk of the losses will fall to the government. But agency officials maintain that because banks still have a “material” exposure, they will be reluctant to do this.

“There is certainly an incentive for the banks to play fair and do right, but there is never a limit on the ability of the private sector to shift cost to the government,” former FDIC general counsel John Douglas told The Journal.

A typical deal has the FDIC agreeing to cover 80% of future losses on a big portion of the assets, and 95% on the rest. However, the FDIC does not expect to see the 95% scenario play out on any of the deals it has made so far.

Source: U.S. Turning Profit on TARP, but Big Loans Remain in Banks’ Hands

The details of the repayments were as follows:

• Morgan Stanley (NYSE:MS) repaid $10 billion

• Goldman Sachs (NYSE:GS) – $10 billion

• BB&T (NYSE:BBT) – $3.1 billion

• US Bancorp (NYSE:USB) – $6.6 billion

• Bank of New York Mellon (NYSE:BK) – $3 billion

• Capital One (NYSE:COF) – $3.57 billion

• American Express (NYSE:AXP) – $3.39 billion.

Lost in the euphoric brouhaha over the TARP repayments was the dispiriting news that Standard & Poor’s had downgraded the credit ratings of 18 large American banks, including one of the seven that repaid its TARP loan!

Incredibly, the US Treasury deemed Capital One sufficiently healthy to repay its $3.57 billion loan while, at the very same moment, Standard & Poor’s downgraded the credit card firm to BBB – just two notches above “junk.” Standard & Poor’s also characterized the credit outlook for Capital One as “negative.”

We would not place much faith in the analyses of either the Treasury Department or Standard & Poor’s. But we are nevertheless fascinated by their conflicting conclusions. Maybe they’re both right. Maybe Capital One is in fine shape today, as the Treasury Department’s stress test implies. But maybe the credit card company will be in miserable shape tomorrow, as Standard & Poor’s downgrade implies.

As investors, we see these conflicting assessments of Capital One as a metaphor for the entire American financial sector. This sector is a hodgepodge of conflicting opinions, data points and risk/reward assessments. Both sides of every trade in the financial sector can point to some sort of fundamental justification. The buyers see a sector on the mend; the sellers see a sector in the mire.

Your California editor is not smart enough to know which assessment is correct; but he is fearful enough to recognize a potential tar pit when he sees one. So he’s got no problem watching others wade into the water while he remains back on the bank…at least for now.

Curiously, bank stocks have gotten worse, ever since the government told us things are getting better. Most finance company stocks have been performing poorly, ever since the upbeat headlines about the “stress test” results first crossed the newswires. The BKX Index of bank stocks has tumbled nearly 19% since the close of trading on May 8, the first trading day after the Federal Reserve announced the “better than expected” results of its stress tests on America’s 19 largest financial institutions.

The TARP repayment announcements did not alter the downward trend of the BKX. Since June 9, when the Treasury Department disclosed which banks may repay their TARP loans, the BKX Index has dropped 5%.

Apparently, the finance company sector of the stock market has shifted into the “good news is no longer good news” phase. The BKX’s dazzling 135% rally between March 6 at May 8 may have adequately “priced in” all the good news that is likely to emerge for a while from the financial services industry.

Furthermore, the conspicuous recent weakness of the BKX Index is probably not good news for the overall stock market, since financial shares have been leading the market – both to the upside and the downside – during the last year and a half.

To cite just one example of this phenomenon, between February 1 and May 31 of 2008, the BKX slumped 21% while the S&P 500 actually advanced 1%. But during the ensuing month and a half, the S&P fell 13%. The BKX initiated a similar “bearish divergence” in early December last year, as it tumbled 35% between December 5 at February 6. The S&P 500 barely budged during this timeframe, but fell 20% over the next 30 days.

Obviously, the most recent decline of the BKX does not guarantee a subsequent decline in the S&P 500. But neither does it give us a warm, fuzzy feeling. So let’s call the weakness of the BKX a warning sign. Heed the warning, if you are so inclined.

Source: On the Mend or in the Mire?

“What we’ve seen is a continued rally in risky assets — equities, commodities and emerging markets,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon (NYSE:BK).

It’s “the green-shoots rally that has really perpetuated the dollar sell-off in recent weeks,” Woolfolk added. “It’s not being driven by fundamentals but market sentiment.”

The buck was strong as long as economic turmoil and fear dominated market thinking, with the currency seen as a safe haven. Now, however, the appetite for riskier investments is on the rise “across the board,” notes Kenneth Broux, of Lloyds TSB in London. “It certainly looks like there is a great acceleration in recent trends.”

Among the day’s numbers, the Institute of Supply Management’s national manufacturing index rose to 42.8 in May from 40.1 in April. That bettered economists’ expectations for a reading of 42, but anything below 50 indicates that industry is still contracting.

Meanwhile, the Commerce Department reported a 1.1% rise in disposable incomes in April, which mostly went into savings rather than spending. The personal savings rate jumped to 5.7% in April, a 14-year high.

Real consumer spending fell 0.1%, the second consecutive decline and the 8th decline in the past 11 months. Inflation was relatively tame in April, with consumer prices rising 0.1%, and core prices — which exclude food and energy – up 0.3%.

Source: Dollar Weak Against Euro

GM dealers targeted for separation were informed by letter over the weekend, Reuters reported.

The eradication of hundreds of hundreds of American auto dealerships is merely the latest development in the ongoing dismantling of the so-called U.S. “Big Three’’ – a  process that seems likely to leave Ford Motor Co. (NYSE: F) as the last American automaker standing.

“These companies are making up for now for what they have avoided doing for years, if not decades,” industry analyst John A. Casesa, managing partner of consultantcy Casesa Shapiro Group LLC, told The New York Times. “And if the market doesn’t stabilize, this may only be Phase I.”

The moves will clearly change the entire auto-purchasing landscape for U.S. consumers. All told, nearly 800 dealers selling Chrysler brands were given notice that they would be cut off next month. These dealers represent about a quarter of the 3,200 in Chrysler’s dealership network, but account for only 14% of the company’s sales.

Without the dealership cuts, U.S. automakers will likely see their troubles continue. For instance, in its bankruptcy filing, Chrysler says it needs to streamline its distribution-and-sales operation to become more competitive. The current Chrysler dealership sells 303 vehicles per year, compared with 1,219 for a Honda (NYSE ADR: HMC) and 1,292 for Toyota. (NYSE ADR: TM).

GM is looking to close as many as 2,600 of its dealers – about 40% – by 2010. This weekend, it notified the first 1,010 that their franchise deals with General Motors would not be renewed after they expired in October. The other dealerships that will get cut are those that sell such brands as Hummer and Saturn – brands that GM plans to divest.

Both Chrysler and GM have been subsisting on government loans for months.

Just a few years ago, U.S. auto dealers were selling an aggregate 16 million vehicles annually. But after the biggest drop in vehicle sales in a quarter century, dealers are now struggling to even reach the 10-million-vehicle mark.

The letters to GM dealers did not specifically say the company would be filing for bankruptcy, but the move indicates that could well happen next month, which is when the longtime No. 1 U.S. automaker is due to submit a restructuring plan to U.S. President Barack Obama, The Times reported.

In fact, General Motors sales chief Mark LaNeve told reporters on a conference call that carrying out the plan without the benefit of bankruptcy-court protection would be nearly impossible, since state franchise laws make it “onerous and expensive” for manufacturers to force dealers out of business. Wrapped in the cloak of bankruptcy protection, however, the dealership contracts can be nullified, the The Wall Street Journal said.

Chrysler on Thursday asked its bankruptcy judge, U.S. Justice Arthur J. Gonzalez, to hold a hearing on June 3 to allow the company to reject its “contracts and unexpired leases with certain domestic dealers.”

At a time when the falling earnings are continuing to push U.S. companies to make deep job cuts, the dealership closures will add to the national rise in joblessness. The National Automobile Dealers Association (NADA) has estimated that all dealership closings – including those already announced by Chrysler and GM – could cost the U.S. economy 187,000 jobs – or more than the total U.S. employment of the two companies.

Market Matters

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).

To date, some signs have emerged that the recession may be nearing an end, though naysayers also warn about the ramification of “excessive” intervention.

On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could even impact employees at institutions that did not accept bailout moneys.  While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.

President Obama’s administration also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions.  While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact.  Stay tuned.

With the much-ballyhooed stress-tests in the books, banks moved to raise capital with US Bancorp (NYSE: USB), Capital One Financial Corp. (NYSE: COF), and Bank of NY Mellon Corp. (NYSE: BK) among those issuing $1 billion to $2.5 billion in new stock (and diluting current shareholders).

In fact, US Bancorp expects to be the first major institution to repay Troubled Asset Relief Program funds over the next few weeks.  Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3 billion-plus government infusion with others to follow.  Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000-share offering of its own.  GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood.

On the earnings front, Macy’s Inc. (NYSE: M), JC Penney Co. Inc. (NYSE: JCP), Liz Claiborne Inc. (NYSE: LIZ), and Sony Corp. (NYSE ADR: SNE) all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity.  While Wal-Mart Co. Inc. (NYSE: WMT) continued to outshine rivals, its earnings were negatively impacted by currency translation.

Both SAP AG (NYSE ADR: SAP) and Intel Corp. (Nasdaq: INTC) expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses.  Microsoft Corp. (Nasdaq: MSFT) announced its first debt offering in its 36-year existence and some expect the tech giant to explore acquisition opportunities.

Economically Speaking

Yep, the consumer is a fickle sort.  In fact, consumer statistics are quite fickle these days as well.  A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy.  Well, this past week, the U.S. Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months.  Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Wall Street expectations.

Additionally, the University of Michigan Sentiment Index reached its highest confidence level since September 2008.  As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as the producer price index (PPI) climbed in April on rising food prices and the consumer price index (CPI) was reported as unchanged last month.  Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day.  Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments.

Weekly Economic Calendar

Source:  Chrysler, GM Dealer Cuts Point to More Rough Times Ahead for U.S. Automakers

Judicial Watch said the Treasury initially said it had no records about the meeting. It didn’t release a transcript of discussions between government officials and bankers.

However, documents obtained under a Freedom of Information Act request confirm that Paulson and other Treasury officials gave nine major banks no options other than allowing the government to take $250 billion in equity.

Judicial Watch said on its Web site that after it made inquiries, the Treasury insisted on Feb. 4 it had no documents about the historic meeting.

Furthermore, “the cover-up continues, as the Obama administration protects Timothy Geithner by withholding a key document about his role in this infamous bankers meeting,” Judicial Watch president Tom Fitton said in a statement.

The group says suggested edits of the “talking points” for the meeting by Treasury Secretary Tim Geithner, then President of the New York Federal Reserve are being withheld by the Obama administration.

Saying the nine U.S. banks were “central to any solution” of the credit crisis, Paulson told their leaders in the meeting in Washington on October 13, 2008, to take the government aid voluntarily or be forced to by regulators.

“We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed,” the document said, citing Paulson talking points. “If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance.”

Within four hours of the start of the meeting the CEOs wrote by hand the names of their institution and multibillion dollar amounts of “preferred shares” to be issued to the government, the documents show.

“These documents show our government exercising unrestrained power over the private sector,” Fitton said in a statement.

The banks were represented by Vikram Pandit of Citigroup Inc. (NYSE: C), Kenneth Lewis of Bank of America Corp. (NYSE: BAC), John Thain of Merrill Lynch & Co., now part of BofA, Jaime Dimon of JP Morgan & Co. (NYSE: JPM), Richard Kovacevich of Wells Fargo (NYSE: WFC), John Mack of Morgan Stanley (NYSE: MS), Lloyd Blankfein of Goldman Sachs Group Inc. (NYSE: GS), Robert Kelly of Bank of New York Mellon Corp (NYSE: BK), and Ronald Logue of State Street Corp. (NYSE: STT).

A spokesman for the Treasury, Andrew Williams, didn’t return calls seeking comment from Bloomberg News.

The Treasury has invested $199.1 billion in the bank-preferred share program, with $1.2 billion since returned by 12 institutions, according to government data, Bloomberg reported.

Despite his heavy-handed nature, Paulson succeeded at stabilizing the financial services industry, J.P. O’Sullivan, an SNL Financial bank analyst in Charlottesville, Va., told Bloomberg.

“It was a calming mechanism,” O’Sullivan said.

This isn’t the first time Paulson has been accused of strong-arming bankers to bend to his will.

As previously reported in Money Morning, Bank of America CEO Kenneth Lewis said in testimony before New York’s attorney general that Paulson and Federal Reserve Chairman Ben S. Bernanke pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank.

Lewis went on to testify that he felt Paulson threatened him with losing his job if he didn’t go along with completing the Merrill Lynch deal.

“I can’t recall if he said, ‘We would remove the board and management if you called it [off]‘ or if he said ‘we would do it if you intended to.’ I don’t remember which one it was,” Mr. Lewis said.

Source:  Watchdog Alleges Obama Administration in “Cover Up” of Docs from Treasury Meeting with Banks

Banks that require funding will have 30 days to present a capital-raising strategy to regulators and then six months to implement it.

It is unlikely that any of the banks will require any additional taxpayer money.

J.P. Morgan Chase & Co. (NYSE: JPM), Goldman Sachs Group Inc. (NYSE: GS), MetLife Inc. (NYSE: MET), American Express Co. (NYSE: AXP), Bank of New York Mellon Corp. (NYSE: BK), BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB), and State Street Corp. (NYSE: STT) are in the clear in terms of having adequate capital cushioning.

The following banks will be required to raise these assigned amounts of capital:

• Bank of America Corp. (NYSE: BAC): $34 billion.
• Wells Fargo & Co. (NYSE: WFC): $13.7 billion.
• GMAC LLC (NYSE: GMA): $11.5 billion.
• Citigroup Inc. (NYSE: C): $5.5 billion.
• Morgan Stanley (NYSE: MS): $1.8 billion.
• Fifth Third Bancorp (NASDAQ: FITB): $1.1 billion.
• KeyCorp (NYSE: KEY): $1.8 billion.
• PNC Financial Services (NYSE: PNC): $600 million.
• Regions Financial Corp. (NYSE: RF): $2.5 billion.
• SunTrust Banks Inc.( NYSE: STI): $2.2 billion.

The banks will have until June 8 to develop a plan to raise the required capital and until Nov. 9 to implement it. They may choose to raise the money in a variety of ways. They may sell assets, court private investment or convert the government’s existing preferred shares into common stock.

Citigroup has already announced plans to convert a portion of the government’s $45 billion stake into common stock, a move that will give the federal government a 36% stake in the company. Other regional banks – such as Fifth Third Bank or Regions Financial – could be forced to take similar actions, but are loath to do so, as most of the moves would be dilutive to existing shareholders.

Citigroup has agreed to sell Nikko Cordial Securities to Sumitomo Mitsui Financial Group (OTC: SMFJY) for about $5.5 billion. The deal, which is to be completed by Oct. 1, is expected to boost the bank’s Tier-1 capital ratio by approximately 27 basis points.

Morgan Stanley plans to close its capital gap by selling assets or stock to private investors, a person briefed on the plan told The New York Times. And Wells Fargo said late yesterday that it plans to sell $6 billion in new common stock in an effort to raise required capital.

While Bank of America has said it doesn’t agree with the Fed’s conclusions, the bank yesterday outlined its strategy to accommodate the government’s demands. BofA is exploring the sale of such business units as its First Republic private-banking unit and asset manager Columbia Management, The Wall Street Journal reported.

The sale of those businesses could raise a combined $4 billion, David Hendler of CreditSights Inc. told The Journal. BofA could also get about $8 billion for its partial stake in China Construction Bank Corp.

Beyond that BofA would have the options of converting the government’s existing $45 billion investment, or $33 billion in private preferred shares, into common stock.

The Fed wants bank-holding companies to achieve a Tier 1 risk-based ratio of at least 6%, and a Tier 1 Common risk-based ratio of at least 4% by the end of 2010. The goal is to get banks to the point where they are stable enough that they can borrow from private investors without a Federal Deposit Insurance Corp. (FDIC) guarantee, people familiar with the matter told Bloomberg News.

“Going forward, we just need banks to be able to issue debt without the FDIC backing – that’s the next stage for these bank names in terms of evaluating their health,” Mark Bronzo, a money manager at Security Global Investors LLC, which oversees $21 billion in Irvington, N.Y., told Bloomberg.

If the banks fail to meet capital requirements, the government will step in to provide the necessary funds. However, it’s unlikely that any more taxpayer money will be needed, as about $110 billion of the original $700 billion in Troubled Asset Relief Program (TARP) funding remains.

Wall Street’s Reaction

The Dow Jones Industrial Average closed down 102.43 points, or 1.2%, yesterday, with the Dow Jones U.S. Financial Services Index down 3.78%. However, Wall Street’s reaction to the tests won’t be fully realized until the market opens later today (Friday).

“I think this will be a confidence-instilling announcement,” Federal Deposit Insurance Corp. Chairman Sheila Bair told a Senate panel Wednesday. “There will be additional needs for capital buffers for some institutions, but I think there will be mechanisms to do that within the next six months.”

Treasury Secretary Timothy F. Geithner said in an interview with PBS television’s “The Charlie Rose Show” that all of the institutions tested already have “significant cushions” of capital and that Americans have every reason to be confident going forward.

“The results will be, on balance, reassuring,” Geithner said.

But some analysts are skeptical about what the bank stress tests actually achieved, or if their standards of evaluation were even valid in the first place. After all, the tests have occupied resources from both the federal government and the private sector for months, and have increased stock market volatility.

“The banks are healing themselves, and it could have been done a lot faster if government had gotten out of the way instead of parking the emergency equipment in the middle of the road,” Gary B. Townsend, a former banking regulator who now runs his own investment firm, told The New York Times.

Also, many bank employees, and even Elizabeth Warren, who chairs the Congressional Oversight Panel for TARP, have expressed concern that the tests weren’t stringent enough.

Last month, Warren gave rise to speculation that another stress test might be needed by the end of the year, after she called the adverse economic scenario employed by the Fed “disturbingly close” to current economic conditions.

In the Fed’s most pessimistic economic forecast, for example, the government projects the unemployment rate will climb to 10.3% in 2010. But unemployment already hit 8.5% in March and many economists are predicting that it rose to 8.9% in April. If that’s the case, it’s not hard to imagine the national jobless rate reaching double digits by the end of the year.

“The stress tests will make a terrific contribution if they are tough and transparent,” Warren said. “If they are not, they will be useless.”

Still, despite the test’s alleged failings, there is a hope that with more transparency and a greater buffer of equity, investor confidence will be restored.

“This is sending a message that the banks need more capital, but their losses are manageable and the system itself is solvent,” Kevin Fitzsimmons, an analyst at Sandler O’Neill told The Times. “Whether it sticks is something else.”

Source: Bank Stress Tests: The Results Are in; Now What?

The influential data of the day was ADP’s jobs number, which showed that U.S. private-sector employment fell by 491,000 in April. While hardly good news, that was the smallest decline since October.

The number beat expectations and raised hopes that economists’ gloomy predictions for the Labor Department’s jobs report, due out on Friday, may not be fulfilled. Consensus projection is for a decline of 580,000.

“By any measure except the past few months, a 491,000 drop in private payrolls is disastrous, but at least it is less disastrous than before,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

Gains by the euro were capped, though, after Standard & Poor’s cut its ratings for five out of six rated German Landesbanks, financial institutions owned by regional government and local community savings banks.

The downgrade “contributed to risk aversion and pushed up the dollar,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon (NYSE:BK).

Source: Dollar Declines Against Euro

Martin applied four criteria when examining banks’ health:

Banks that made profits in the very difficult fourth quarter of 2008 and first quarter of 2009 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost.)

Banks that lost money in the fourth quarter and first quarter may or may not be in terminal trouble; it depends on the amount of those losses and whether the red ink is expected to continue to flow going forward.

With the run-up in bank stocks in recent weeks, there’s been an accompanying rise in the ratio of share price to book value (stock price per share/book value per share). If that ratio is still below 30% – even after the recent price increases – the market lacks confidence in the bank’s ability to solve its own problems. Unfortunately, the market currently appears to be overly optimistic about some of the banks that still have considerable ongoing problems.

Management’s dividend policy is less of an indicator than it was just a few short months ago; several banks have sharply cut their dividends in order to repay the Troubled Assets Relief Program (TARP) capital they got in late 2008. Reasonably, profitable banks don’t want the government meddling in their business or compensation structures

This research revealed three “hidden gem” banks among the dross. They are (in alphabetical order):

BB&T Corporation (NYSE:BBT) – With $152 billion in assets, and a $3.1 billion TARP investment, this North Carolina-based regional bank has its primary operations in the Mid-Atlantic region. A recent share price of $23.42 meant that BB&T was trading at about 94% of book value. BB&T was profitable in each quarter of 2008 and in the first quarter of 2009, making $1.5 billion for all of last year and $271 million in first quarter of 2009. It maintained its dividend of 47 cents a share for first quarter of 2009, the only bank to maintain its full payout. The question, of course, it whether management will be tempted to follow fashion and cut the dividend next quarter; otherwise, it looks very solid.

State Street Corporation (NYSE:STT) – With $174 billion in assets, and a $2 billion TARP investment, this Boston-based bank is focused chiefly on serving institutional investors worldwide. Its recent share price of $37 meant that State Street was trading at 146% of book value. Its 2008 earnings per share (EPS) of $3.89 represented a year-over-year increase of 13%. First quarter net income down 16%, but State Street still earned $445 million. It pays a quarterly dividend of 24 cents per share. With a global business, conservative leverage and Boston management, State Street is a great risk. But it’s somewhat of an unexciting investment currently as securities issues and trading volume have fallen.

Bank of New York Mellon Corporation (NYSE:BK) – With $237 billion in assets and a $3 billion TARP investment, this New York-based bank has its primary operations in New York and Pennsylvania and has an institutional/corporate orientation. With its recent share price of $26.88, it is trading at 122% of book value. It reported 2008 net income of $1.39 billion, and first quarter profit of $322 million, after which the bank reduced its quarterly dividend from 24 cents to 9 cents a share. Looks solid to me.

U.S. Bancorp (NYSE:USB) has $266 billion in assets, and a $6.6 billion TARP investment and is a regional bank headquartered in Minneapolis that operates primarily in the Midwest and Northwest. A recent share price $18.97 means it is trading at 176% of book value. It reported a 2008 profit of $2.94 billion, and a first quarter profit of $419 million. U.S. Bancorp cut its quarterly dividend from 42.5 cents per common share to 5 cents a share, as it wants to pay back its TARP investment. This bank is in good shape, but its capital base would become too thin if it repaid TARP; I’m not sure I want to pay 11-12 times earnings for this stock when the dividend’s so low and the uncertainties are so high, as there’s still some chance of dilution, should it raise capital.

Traders were squaring long U.S. dollar positions ahead of Wednesday’s Fed decision and first-quarter GDP release, according to Michael Woolfolk, senior currency strategist at Bank of New York Mellon (NYSE:BK).

“The event risk of these events may limit appetite for fresh U.S. dollar exposures, with renewed U.S. dollar buying likely to resume if first-quarter GDP disappoints or the Fed announces further QE [quantitative easing] measures,” Woolfolk said.

The day’s numbers provided some support for an expansion of risk.

The Conference Board reported that its U.S. consumer confidence index jumped to a reading of 39.2 in April from 26.9 in March. The month-over-month gain was the fourth-largest ever in the 32-year history of the survey.

At the same time, Standard & Poor’s Case-Shiller home price index declined in February, as home prices in 20 major cities fell 2.2%. But that was good news of sorts, since it was less than the 2.8% drop in January. It was also the first time in 16 months that the year-over-year decline in prices did not set a record.

For what it may be worth, prices are “no longer falling off a cliff,” wrote Patrick Newport, of IHS Global Insight. “Instead, they are rolling down a steep hill.”
Source: Euro Gains on Dollar

Analysts said the buck was pressured by light position-squaring ahead of this week’s G-20 nations meeting.

However, the dollar’s outlook “remains one of strength and stability against the majors, despite the ongoing deluge of negative U.S. economic data,” said Michael Woolfolk, of the Bank of New York Mellon (NYSE:BK).

The latest iteration of that negative data came yesterday in the form of Standard & Poor’s Case-Shiller 20-city home price index, which fell a record 2.8% in January. Prices are down 29% from the peak in mid-2006, and have fallen to September 2003 levels.

“There are very few bright spots that one can see in the data,” understated David Blitzer, chairman of the index committee at S&P.

Economists for (NYSE:BAC) Bank of America’s Merrill Lynch concurred, writing that, “Looking ahead, depressed demand, tight credit, rising default rates and excess inventories will continue to lead prices lower … We estimate that an additional 10%-15% in downside is still in store.”

Separately, the Conference Board said its index of consumer confidence inched up to 26 in March, from an upwardly revised 25.3 in February. But it still came in under economists’ expectations for a reading of 28.

Source: Dollar Weakens