Up to 9 Stress-Tested Banks May Need Fresh Capital, Says KKR's Maughan

Just days before the government releases official results of the much-hyped stress tests applied to 19 financial institutions, discussions on which ones will be required to raise capital are still going strong. According to Sir Deryck Maughan, partner and chairman of Kohlberg Kravis Roberts Japan who also leads the KKR financial services industry team, as many as three-quarters of the banks reviewed may be in need of additional capital.

These could include Citigroup and Bank of America, the Wall Street Journal reported this morning, although they seem to have objected to these preliminary results. Final results should be released next week.

At least eight to nine of the 12 banks currently ongoing stress tests will require additional capital, according to Maughan. (While 12 of the 19 financial institutions under review are banks, the remaining seven include firms like Metlife, American Express and GMAC.) Maughan was speaking at a forum on the financial crisis organized Monday at J.P. Morgan Chase in downtown New York. While he didn’t name specific banks, Maughan estimated a total of $50 billion to $70 billion in new capital will be required.

The move could greatly increase the federal government’s stake in banks, most likely by converting capital provided through the Troubled Assets Relief Program into equity. “We will have significant shareholding,” he said of U.S. taxpayers, adding that 542 institutions have so far received TARP funding. “If TARP is converted into common, we, the public, will have a 27 percent voting share in banks.”

It only seems normal then that the public should be somehow represented on the banks’ boards, as Robert Reich, professor of public policy at the University of California, noted Friday.

Taxpayers are also exposed to other types of financial institutions like credit card companies and auto loan companies. Today, only 45 percent of all loans come from banks, Maughan said. The rest come from these other financial institutions, which Maughan calls shadow banks.

These institutions carry some $14 trillion of assets that have no funding base, he said, mostly because the securitization market shut down. “The Fed extended $2 trillion, but that’s still $12 trillion to go.” The private sector may provide some capital, but it still needs to have a better picture of the balance sheets of these institutions before making investments. The most likely outcome? The government will continue to foot the bill.