Obama begins ‘stress tests’ of banks
Obama administration begins "stress tests" to gauge the health of America's biggest banks.
As the Obama administration begins “stress tests” to gauge the health of America’s biggest banks, fresh evidence emerged of a weakening housing market, with sales of existing homes falling unexpectedly last month to the lowest level in nearly 12 years.
Banking regulators plan to scrutinize the financial conditions of Citigroup Inc., Bank of America Corp. and more than a dozen other institutions that have received billions from the Treasury Department’s $700 billion bailout pot.
The tests will help regulators decide whether the banks have sufficient capital — and the right mix of it — to withstand any additional shocks to the economy over the next two years.
The tests also will help regulators decide whether the banks may need additional assistance so that they can carry out the critical mission of boosting lending to customers, a key ingredient to the economic turnaround.
On the housing front, the National Association of Realtors said Wednesday that sales of existing homes fell 5.3 percent to an annual rate of 4.49 million last month, from 4.74 million units in December. It was the weakest showing since July 1997 and well below the slight rise in sales that economists expected.
The median sales price plunged to $170,300, from $199,800 a year earlier. That was the lowest price since March 2003 and the second-largest drop on record.
Wall Street slumped on the news. The Dow Jones industrial average, which had been down about 85 ahead of the report, lost about 125 points in early afternoon trading.
And home prices are expected to keep falling this year. That has whittled away Americans’ single-biggest asset and figured prominently in consumers’ decisions to cut back spending, which has sorely hurt the economy.
Meanwhile, Federal Reserve Chairman Ben Bernanke was on Capitol Hill for the second straight day, facing tough questions about controversial bank-rescue efforts and again spurning speculation that the government may nationalize Citigroup or other large financial institutions.
When asked about Citigroup by the House Financial Services Committee on Wednesday, Bernanke said nationalization “is when the government seizes the bank and zeros out its shareholders … we don’t plan anything like that.”
But the Fed chief said it is possible the government could end up with a much bigger ownership stake in Citigroup Inc. or other banks. In the case of Citigroup, Bernanke said “we’ll see how their test works out and what evolves.”
Bernanke was referring to new “stress tests” that regulators will start conducting on the biggest banks to judge whether they can hold up if the recession were to worsen.
“The outcome of the stress test is not going to be fail or pass,” Bernanke said Tuesday. “The outcome of the stress test is, how much capital does this bank need in order to meet the credit needs of borrowers in our economy?”
Critics worry the government’s rescue actions have the potential to put ever-more taxpayers’ dollars at risk and encourage “moral hazard,” where companies feel more comfortable making high-stakes gambles because the government will bail them out.
On the economic front, Bernanke told lawmakers that the economy was suffering through a “severe contraction.” But he planted a seed of hope that the recession might end this year if the government managed to prop up the shaky banking system.
Speaking to Congress Tuesday evening, President Barack Obama said more money would be needed to rescue troubled banks beyond the $700 billion already committed last year. Saying he understands bank bailouts are unpopular, he insisted it was the only way to get credit moving again to households and businesses. He also called on Congress to move quickly on legislation to overhaul regulations on the nation’s financial markets.
Bernanke says the economy is likely to keep shrinking in the first six months of this year after posting its worst slide in a quarter-century at the end of 2008.
However, the Fed chief is hopeful the recession will end this year, but there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again.
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