Banks, Chrysler Face Week of Reckoning

Speculation surrounding the recently completed bank stress tests remains a top story today, even though nothing new has been announced since Friday. The Wall Street Journal narrows down the idententities of a few of the less obvious institutions that underwent stress tests, reporting that at least three were likely "regional banks with substantial exposures to commercial real estate in the Midwest and Southeast." Groundbreaking. And, as was also reported yesterday, government officials believe the majority of the tested banks will be able sidestep government aid by raising money from private investors, among other options.

One alternative may be government's existing investments into "a new type of equity that would better cover banks" in case things get worse. "In the latter scenario, the U.S. could end up owning large chunks of banks, raising the specter of something akin to nationalization," the WSJ says. Federal officials assure that any such situation would be temporary.

Bloomberg adds that healthier banks may simply keep dividend payments low. Dino Kos, a former markets director at the Federal Reserve Bank of New York, tells Bloomberg that most banks are going to have to raise capital in some way, shape, or form. "All of them," she said, "will need to conserve capital through retained earnings." The New York Times chimes in with an editorial calling for the government to "act quickly to plug the holes" for banks with "severe" capital shortfalls. "The banks' current executives would be fired, shareholders would be wiped out and bondholders would take a haircut. But that is the best way to ensure that the banks' finances are quickly and efficiently restructured, and the taxpayers' investment is protected."

The results of the tests will be made public May 4, and although it is still not clear how the information will be disseminated, it is likely the banks will make the announcements themselves.

Reuters turns its attention to Michigan with this upcoming week being one of reckoning for Chrysler. Thursday is the government-imposed deadline for Chrysler to announce a viable restructuring plan that must also outline debt-cutting measures and a deal with Italian auto maker Fiat SpA. If it is approved, Chrysler will be eligible for another $6 billion lifeline from the government. If not, it will be forced into Chapter 11 bankruptcy. At this point, the ball is in the creditors' court as union workers have already agreed to numerous concessions, members of Michigan's Democratic congressional delegation said Saturday. Michigan Democratic Gov. Jennifer Granholm at a fundraiser last night, said: "This is going to be a tough week and new battle lines have been drawn. Who knew [Chrysler's creditors] would take that bailout money and then kill this great industry?"

According to Reuters, the company is in talks now with the Canadian Auto Workers union to reduce hourly labor costs by $15.70 and save Chrysler close to $200 million annually in "benefits, time off, 'legacy costs' and improved productivity, but not through lower base wages or reduced pensions."

The WSJ reports that on Friday, Chrysler's lenders made their most generous offer yet, agreeing to "trim their $6.9 billion in secured debt to $3.75 billion, down from a $4.5 billion offer made Tuesday," and have dropped their request for $1 billion of preferred stock in Chrysler as well as a separate request that Fiat put $1 billion of cash into Chrysler. They did, however, remain unyielding on their request to keep 40 percent of the equity of the restructured manufacturer. The paper says that the new offer "leaves lenders and the government still far apart on the main terms." The government wants lenders to keep only $1.5 billion of debt with a mere 5 percent stake in the company.

Bloomberg reports that the International Monetary Fund might for the first time sell bonds to raise capital to "finance loans and aid to member countries during worst economic slump in the fund's 64-year history." Among the countries interested in buying the bonds are emerging nations China and Brazil. The news comes only a few weeks after the G20 pledged to triple the IMF's lending capacity to $750 billion, yet officials say that some member states aren't making "adequate contributions." The IMF has received $324.5 billion in commitments from G20 members since mid-March.

The Washington Post writes that in fact, the IMF seeks to boost its fund to $1 trillion and that it has already raised some $500 billion. It also plans to raise $250 billion by printing its own money, including the dollar, the euro, the yen, and the pound. The IMF also agreed at its spring meeting with the World Bank to "broaden its mission and accelerate plans to give developing giants including China, Brazil and India more say within the institution." The fund will now be "charged with aggressive monitoring of the global economy" and will, for the first time since it creation at the end of World War II, provide a "rigorous review" of the U.S. financial system.