Bernanke Provides Hope That Banks Could Survive and Economy Can Recover
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Bank stocks are rallying higher today, likely propelled by comments from Federal Reserve Chairman Ben Bernanke to Congress. Bernanke indicated that government ownership of the banks is not a good option, saying, "I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn't necessary."
Commenting on the prospects of an economic recovery, Bernanke said, "If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."
Bernanke also shed some light on how the government would convert preferred stock into common stock ownership, as may be needed with Citigroup (NYSE: C). Bernanke said this would happen gradually and occur over time as losses occur. Bernanke said, "The bank could convert the preferred to common to make sure that it has sufficient common equity, and only at that time, going forward, if those losses do occur, would the ownership implications become relevant."
Bernanke said a government stress tests will look at the balance sheets and the capital needs of the 19 largest banks over the next two years. Bernanke said the government wants to ensure that banks can lend even if the economy worsens. He said they will preform a "tough evaluation" of the banks and won't let them hide anything.
Seperate reports today indicated that the Federal Reserve will be urging banks to put money into new loans or bolster loss reserves instead of paying out dividends. Last night, JPMorgan Chase (NYSE: JPM) cut their dividend 87%, from $0.38 to $0.05. Wells Fargo (NYSE: WFC), US Bancorp (NYSE: USB) and PNC (NYSE: PNC) could also expected to be urged to cut their dividend.
Shares of Citigroup (NYSE: C) are 9% higher, Bank of America (NYSE: BAC) is 16% higher, JPMorgan Chase (NYSE: JPM) is 5% higher, Wells Fargo (NYSE: WFC) is 15% higher, PNC Financial (NYSE: PNC) is 10% higher and US Bancorp (NYSE: USB) is 11% higher.
Commenting on the prospects of an economic recovery, Bernanke said, "If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."
Bernanke also shed some light on how the government would convert preferred stock into common stock ownership, as may be needed with Citigroup (NYSE: C). Bernanke said this would happen gradually and occur over time as losses occur. Bernanke said, "The bank could convert the preferred to common to make sure that it has sufficient common equity, and only at that time, going forward, if those losses do occur, would the ownership implications become relevant."
Bernanke said a government stress tests will look at the balance sheets and the capital needs of the 19 largest banks over the next two years. Bernanke said the government wants to ensure that banks can lend even if the economy worsens. He said they will preform a "tough evaluation" of the banks and won't let them hide anything.
Seperate reports today indicated that the Federal Reserve will be urging banks to put money into new loans or bolster loss reserves instead of paying out dividends. Last night, JPMorgan Chase (NYSE: JPM) cut their dividend 87%, from $0.38 to $0.05. Wells Fargo (NYSE: WFC), US Bancorp (NYSE: USB) and PNC (NYSE: PNC) could also expected to be urged to cut their dividend.
Shares of Citigroup (NYSE: C) are 9% higher, Bank of America (NYSE: BAC) is 16% higher, JPMorgan Chase (NYSE: JPM) is 5% higher, Wells Fargo (NYSE: WFC) is 15% higher, PNC Financial (NYSE: PNC) is 10% higher and US Bancorp (NYSE: USB) is 11% higher.
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