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Europe’s big banks pass stress tests


RESULTS DON’T EASE ALL FEARS


Only 7 of 91 banks tested must increase reserves


by Anthony Faiola


LONDON — A broad probe into the health of Europe’s finan- cial sector found virtually every major bank in the region fit to withstand severe economic shocks and declared only a hand- ful of smaller institutions at risk. The long-awaited tests were aimed at assuaging fears of a Eu- ropean banking crisis. The Euro- peans followed in the footsteps of U.S. officials who last year con- ducted probes into the health of American banks, forcing almost half of those examined to beef up reserves. Just as the U.S. banks suffered from piles of bad debt from mortgage-backed securities and other credit-bubble excesses, banks in Europe have come un- der scrutiny for their holdings of government bonds from near- bankrupt nations such as Greece. The results are comforting on


the surface, providing the first evidence that Europe’s banking sector may be stronger than some had feared. But skeptics said the clean bill of health given to so many of the region’s banks — only seven out of 91 banks tested were told to increase reserves — raised serious questions about whether the tests had been strict enough. While the results may not panic investors, they may not reassure them, either. Traders showed


their early skepticism by selling off the euro in late trading in New York when the results were pub- lished after the close of markets in Europe.


One major flaw in the testing, analysts said, is that it did not en- vision what would happen to the banks in the event of a full- fledged debt default in nations such as Greece or Spain. Estima- tions of potential losses were based only on each bank’s hold- ings of government debt they are seeking to trade — not those they are holding on to as long-term collateral.


“I think it’s disappointing,”


said Fahd Rachidy, head of global investment for London-based Vantage Capital Markets. He said the real concern in Europe right now centers on the risk of coun- tries going bankrupt. Not factor- ing that possibility into the tests “goes to show you that the tests were not credible enough,” Rachi- dy said. The European Union, severely criticized for a slow response to the debt crisis in the region, in- sisted Friday in a statement that the results “confirm the overall resilience” of Europe’s banking system. To be sure, the tests yield- ed few surprises — with the weak links being five regional banks, or cajas, in troubled Spain; Greece’s ATE bank; and Hypo Real Estate Holding AG, a nationalized bank in Germany. Together, their shortfalls under the most dire economic conditions considered by the tests would amount to a modest $4.5 billion. That number is lower than several analysts have predicted. “The results and the actions


that have been announced to ad- dress bank capital deficiencies


on washingtonpost.com Europe reacts


In response to rosy results, skeptics say long-


awaited stress tests of banks may not dig deep enough. washingtonpost.com/business


promise to significantly strength- en the European financial sys- tem,” said Dominique Strauss- Kahn, managing director of the International Monetary Fund, which has criticized Europe’s re- sponse to the weaknesses of the banking sector. Christine Lagarde, France’s fi- nance minister, told reporters in Paris that the tests had been tough. “I would suggest that those results should be very cred- ible and should raise the confi- dence in European banks,” she said, according to the Associated Press. The prospect of a banking cri- sis in Europe, where financial in- stitutions have been hit by fears of debt defaults in a number of nations, including Spain and Por- tugal, has emerged in recent months as a potential threat to the global economy. Some ana- lysts insisted that the tests gave them little reason to assume that threat had passed. Yet others said that, in some respects, the Euro- pean tests had been tougher than those used by U.S. regulators dur- ing the height of the financial cri- sis. For instance, the Europeans considered severe economic con- ditions — including a fall back into recession — despite new evi- dence from Germany, France and Britain that the economic recov- ery is beginning to take root in


Distressed homeowners look for help in D.C.


the region. “Yes, this stress test has holes, but they still turned out to be stronger than many believed they were going to be,” said Ralph Sil- va, director of Silva Research Net- work, a London-based banking advisory firm. “We thought it was going to be a token affair, and de- spite the criticism it really wasn’t.” The United States conducted a stress test of the 19 largest U.S. banks in spring 2009, now viewed as a key step in stabilizing the financial system amid the cri- sis. Federal bank regulators pro- jected what losses each large bank would incur if the economy performed even worse than was expected, with a steep rise in un- employment and a big drop in home prices. The regulators then required


that banks raise enough capital to ensure they could withstand that adverse economic scenario. They announced the results — the new capital, if any, needed by each bank — in May 2009. They found that 10 of the 19 banks needed to raise new capital, which they did largely by going to private mar- kets. Raising private capital would have been all but impos- sible a few months earlier, but the stress tests made investors more confident that investing in the banks would be safe. The exercise played a key role in helping to stem the financial crisis. And it set the stage for an end to the recession in summer 2009 by removing a layer of un- certainty about the stability of the banking system.


faiolaa@washpost.com


Staff writer Neil Irwin contributed to this report from Washington.


McCafe drinks boost profit at McDonald’s Net income climbed 12 percent at McDonald’s in the second quarter


as customers around the world gobbled up its cheap food and U.S. din- ers responded to its profitable drinks on its hit McCafe menu. For the three months ended June 30, McDonald’s earned $1.23 bil- lion, or $1.13 per share. That’s up from last year’s net income of $1.09 billion, or 98 cents per share. Revenue climbed 5 percent, to $5.95 bil- lion, from $5.65 billion last year.


—Associated Press ALSO IN BUSINESS


 U.S. bank failures top 100 : Regulators shut down banks in Georgia, Florida, South Carolina, Kansas, Nevada, Minnesota and Oregon, bringing the number of failures this year to 103 . The Federal Deposit Insurance Corp. said it took over Crescent Bank and Trust of Jasper, Ga.; Sterling Bank of Lantana, Fla.; Williamsburg First National Bank of Kingstree, S.C.; Thunder Bank of Sylvan Grove, Kan.; SouthwestUSA Bank of Las Ve- gas; Community Security Bank of New Prague, Minn.; d and Home Valley Bank of Cave Junction, Ore. The pace of bank closures this year is well ahead of that of last year, when 140 banks were shut- tered. Friday’s failures are expected to cost the deposit insurance


fund $431 million . The fund fell into the red last year, and its def- icit stood at $20.7 billion as of March 31.  Verizon posts loss: Verizon Communications said Friday it lost $198 million in the second quarter because of a buyout for 11,000 workers. Excluding the severance costs and other items, earnings beat Wall Street expectations, though revenue was slightly lower than analysts had expected. The company said it lost the


equivalent of 7 cents per share from April to June. That com- pares with net income of $1.48 billion, or 52 cents per share, in the same period last year. Revenue slipped 0.3 per- cent, to $26.8 billion from $26.9 billion a year ago. Verizon shares rose 3.8 per- cent, to close Friday at $28.02. —From news services


Faster Forward ROB PEGORARO BILL O’LEARY/THE WASHINGTON POST


A line began forming Thursday outside the Walter E. Washington Convention Center, where the Neighborhood Assistance Corp. of America will be offering free help, 24 hours a day until July 30, to people who are having trouble negotiating mortgage modifications. Story, A10.


Facebook’s test: Translating users to dollars


Trade in information could run up against privacy constraints


by Cecilia Kang


Facebook may be growing like gangbusters, but the question clouding the storybook rise of Silicon Valley’s latest phenom- enon is whether it can figure out how to make money at the same pace.


And although the social-net- working site gets a daily flood of new users around the globe, Facebook’s long-term success might be challenged by some- thing at the heart of its core busi- ness: sharing information. The site, which passed


500 million users this week, says it’s generating enough revenue from advertising to cover its costs. The company is privately held but has its sights on going public one day. It doesn’t charge


its users, and chief executive Mark Zuckerberg said this week on ABC News that it never will. (Washington Post Co. Chairman Donald E. Graham sits on Face- book’s board of directors). Facebook’s lifeblood is the ex-


change of information — people making more online friends and trading more pictures, news sto- ries, music and one-line mood updates — which also happens to be sheer gold for advertisers. Ex- perts say the company treads a delicate line in getting its users to share more information with- out alienating them through overexposure. Federal regulators and privacy groups say the company has been testing the limits of consumer privacy online, and have suggest- ed establishing clearer guide- lines for such sites. “Facebook is in a conundrum,”


said Jeremiah Owyang, an indus- try analyst at San Francisco- based Altimeter Group. “The promise they’ve made is to be closed, or restricted, on who can


see what. But the more informa- tion they make available to out- side networks, the more moneti- zation they have.” Facebook, meanwhile, says its business strategy doesn’t rely on selling information about its us- ers. The company says it doesn’t give user data directly to ad- vertisers but instead places ads from its partners on the pages of users based on its own analysis of aggregated demographic infor- mation.


When the firm shifted its pol-


icy on user information in De- cember, exposing some data about users more broadly on the Web, critics said the move was intended to generate more rev- enue from advertisers who want to tailor ads to specific profiles of Facebook users. But Facebook said users get more out of the so- cial-networking site when they reveal more about themselves to others. If they don’t want that, they have the option to keep in- formation such as their sex, edu- cation, religious beliefs and so-


cial connections under wraps. “There’s a big misperception


that we’re making these changes for advertising,” Zuckerberg said on a media call this year, when the company announced it was dialing back some of the chang- es. “Anyone who knows me knows that that’s crazy.” The issue of online privacy has gained more attention this past week, with two bills in motion in the House that seek for the first time to create rules for how Web sites can collect and share infor- mation about their users to ad- vertisers and third-party market- ing sites. One bill, introduced this week by Rep. Bobby L. Rush (D-Ill.), seeks to give the Federal Trade Commission the authority to create a policy on Internet pri- vacy. The Senate Commerce Committee will hear next week from FTC and Federal Communi- cations Commission leaders, as well as representatives from Google, Apple, Facebook and AT&T, in a hearing about privacy. kangc@washpost.com


Excerpt from washingtonpost.com/fasterforward White iPhone 4 faces further delays


We may see the iPhone 4 on a carrier besides AT&T before we see it in white. Friday morning, Apple announced its second delay to the white version of its smartphone: “White models of Apple’s new iPhone 4 have continued to be more challenging to manufacture than we originally expected, and as a result they will not be available until later this year. The availability of the more popular iPhone 4 black models is not affected.” The phrasing of that statement — less than a week after Apple chief


executive Steve Jobs assured attendees of a news conference that the white model would ship at the end of this month — almost matched a notice posted one month earlier by the Cupertino, Calif., company: “White models of Apple’s new iPhone 4 have proven more challenging to manufacture than expected, and as a result they will not be available until the second half of July. The availability of the more popular iPhone 4 black models is not affected.” Who knew it was so difficult to make this thing in a color besides black? Earlier models of the iPhone did come in a choice of black and white (some users of the white iPhone 3GS reported that its color darkened over time), but the iPhone 4’s exterior is made of glass, not metal or plastic. And that apparently complicates matters. But why would you want any sort of handheld device in white? Ask


anybody who’s carried around a white iPod for long enough — there isn’t a better color to show off every speck and smudge of dirt your hands can leave on the thing. Black, dark gray or anything besides white is the way to go if you don’t want to spend every weekend cleaning the thing. In other iPhone 4 news, those of you clamoring for the free case promised by Apple last week can now order one. But to do so, you’ll need to download Apple’s free iPhone 4 Case program from the App Store to your iPhone, then use that to select either Apple’s “bumper” or a third-party case. Apple’s free-case page also explains how it’s handling refunds for bumper buyers. If you bought with a credit card, the company will credit your account automatically, while those who paid with cash, a check or a gift card must bring their receipt to an Apple Store. And if you bought one in AT&T’s stores, you’ll need to mail in a rebate form.


10-YEAR TREASURY DOWN $5 PER $1,000, 2.99% YIELD


CURRENCIES $1 = 87.37 YEN; EURO = $1.291


DIGEST EARNINGS


Ford posts another profit as sales climb Ford posted a strong second-


quarter profit Friday, its fifth straight quarterly profit, but trimmed its U.S. sales forecast and predicted weaker results in the second half as the economy slowly recovers. The automaker surprised Wall


Street, making $2.6 billion in the quarter as it continued to grab sales from rivals. Ford’s U.S. sales rose 28 percent in the first six


months of 2010. That’s double the pace of industry-wide sales. For the second quarter, Ford earned $2.6 billion, or 61 cents per share, compared with $2.3 billion, or 69 cents per share, from a year earlier. Rev- enue rose to $31.3 billion, beating expectations of $29.8 billion. Shares of Ford rose 63 cents or 5.2 percent to close at $12.72 —Associated Press


SATURDAY, JULY 24, 2010


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