Citi Said to Need Up to $10 Billion

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WASHINGTON -- Citigroup Inc. may need to raise as much as $10 billion in new capital, according to people familiar with the matter, as the government continues negotiations with banks over the results of its so-called stress tests.

The bank, like many others, is negotiating with the Federal Reserve and may need less if regulators accept the bank's arguments about its financial health, these people said. In a best-case scenario, Citigroup could wind up having a roughly $500 million cushion above what the government is requiring.

As regulators delay the release of bank stress-test results, experts wonder whether the exercise, meant to restore confidence in the banking system, will end up producing the opposite effect. Kelsey Hubbard reports for MarketWatch.

The discussions stem from the tests being run by the Fed and the Treasury to assess the health of the country's 19 largest banks. Those results will be released Thursday, later than initially planned.

The tests will predict each bank's potential losses in certain asset categories under dire economic scenarios. The government is expected to direct several banks, including Bank of America Corp., to bolster their capital by raising new funds or converting existing securities into common stock.

The government's strong preference is for banks in need of fresh capital to raise it either through private investors or selling assets, officials say. That won't be an option for certain weaker banks, who may have to give the government big stakes in their common equity to boost capital levels. Such a move would help fill banks' capital needs but would also raise thorny questions about how large a role the U.S. might play in their daily operations.

The Obama administration is expected soon to outline what type of investor it will be in companies where it has a stake, according to people familiar with the matter. The Treasury is discussing applying different levels of governance depending on the size of the U.S. government's stake. The overall goal is to get out of the investments as quickly as is possible and minimize government intervention in banks' operations.

The outcome of the stress tests could play a major role in shaping the next phase of the U.S. government's intervention in the nation's ravaged financial system. After the results, banks will have 30 days to give the government a plan and six months to put it into effect. The banks are expected to reveal their plans next week.

Concerned about investor and depositor panic, government officials have said banks needing more capital should not be viewed as being at risk of collapse. In fact, the government has said it would not allow any of the 19 banks undergoing the test to fail.

Some banks still might need to seek more money from the government.

Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., widely regarded as two of the nation's strongest banks, aren't expected to be required to boost capital, according to people familiar with the matter. It's not clear whether officials will permit the banks to immediately repay the government's existing investments in these banks.

The stress tests are a central part of the Obama administration's effort to restore confidence in the U.S. banking system. They have met resistance from top bank executives who complain the government's estimates are wrong and too theoretical.

The Fed has told bank executives it's looking at a measurement of capital called "tangible common equity," which essentially measures what shareholders would have left if a company were liquidated. Some bankers say the Fed wants them to hold TCE equivalent to at least 4% of their risk-weighted assets, under the stress-test scenarios.

Banks have been scrambling over the past week to refute the Fed's preliminary conclusions. Bankers say those negotiations are part of the reason the government has pushed back its announcement of the results.

"The gloves have been taken off, and there's some real battles going on right now," said Gerard Cassidy, a bank analyst with RBC Capital Markets.

Government officials originally hoped to release the results May 4. The plan now is to do so after U.S. stock markets close May 7. A smooth release is a critical component of the effort, as policy makers fear investors could punish banks that appear to have performed poorly.

"I would not read anything into the delay and results, except the notion that regulators and the administration want to get this right from the very beginning," White House spokesman Robert Gibbs said.

Citigroup announced Friday it was selling its Japanese brokerage business for about $7.9 billion, a deal that will boost the company's tangible common equity by about $2.5 billion. The New York-based company has argued the Fed should give Citigroup credit for the planned transaction, along with other pending sales, as it tabulates the company's capital levels.

Under an earlier government effort to stabilize Citigroup, which involved a conversion of preferred stock into common, the U.S. was going to end up with 36% of Citigroup's common stock. To raise new capital, Citigroup is likely to broaden the conversion to include preferred securities held by private investors. The end result will likely leave Washington holding about the same amount as previously envisioned.

Some banks are haggling with the Fed over how it calculated their projected 2009 and 2010 revenues -- a central factor in gauging banks' ability to absorb losses. Some have pushed the Fed to use their strong first-quarter performances as a baseline, even though many acknowledge their first-quarter results are likely unsustainable.
—Deborah Solomon contributed to this article.

Write to David Enrich at david.enrich@wsj.com and Damian Paletta at damian.paletta@wsj.com

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