WSJ: Bank of America Needs $35 Billion in Additional Equity

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So much for the cheery assumption that Citigroup and Bank of America each needed only $10 billion, based on leaks of Citi’s likely $10 billion need.

This amount of funding is not available from private sources, absent massive dilution of existing shareholders. And assuming, as we and some others, such as Nouriel Roubini, do, that this is not end of banks needing to shore up their balance sheets, the question remains as to why we continue to pretend that banks on government life support are entitled to the rights of private institutions. The time is long past when the powers that be should have stopped with this charade, but it appears it will go at least another round before the mortally wounded are officially taken out of their misery.

From the Wall Street Journal:

Regulators have told Bank of America Corp. that the company needs to raise roughly $35 billion in capital based on results of the government’s stress tests, according to people familiar with the situation.

The exact amount of the needed infusion couldn’t be determined late Tuesday….

At Bank of America, the government’s findings are likely to set off a scramble over how to fill the capital hole at the nation’s largest bank in assets…..

The amount of capital now needed by Bank of America could exceed what the bank can raise by selling assets or more shares to the public.

As a result, the bank may have no choice but to convert the government’s preferred shares into common stock.

That would boost the company’s capital to the level mandated by regulators but could also leave the U.S. government as Bank of America’s largest shareholder.

In the process, the value of the stock held by existing shareholders likely would be sharply diluted…

Government officials have always viewed Bank of America’s predicament slightly differently than problems at other banks.

The bank’s troublesome acquisitions of Merrill and mortgage lender Countrywide Financial Corp. likely saved the government from expensive and messy cleanups that could have exacerbated the financial crisis last year…

The final results suggest that the government wasn’t willing to budge substantially from its initial results, despite Bank of America’s response.

It isn’t clear what Bank of America did to try to sway regulators from the preliminary findings, or whether executives still are trying to do so.

As I said, things are not as bad as I feared, Having designed a test that errs on the side of being too industry friendly, Treasury is at least showing a bit of resolve. But the fact that it indulged the industry with days of back and forth still reveals a peculiar hesitation to exercise authority.

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  1. Bob Goodwin

    Oh come on Yves. I am as surprised as you are that the stress tests failed *any* bank, much less this badly. The banks have (mostly) refrained from squeeling like stuck pigs, which is exactly what they would have done if they did not have a chance to contest the findings.

    They had their day in court, and the government seems to be sticking to their guns.

    I don’t think the government got religion, but they seem to have gotten the political message.

  2. mmckinl

    B of A market cap 69 billion

    TARP 45 billion

    capitalization 24 billion

    and they need 35 billion


    And Lewis was going to pay back TARP by the end of 2009 80 billion …


    Lewis should be fired and prosecuted …

  3. Steve

    Let’s not forget the $118B backstop BoA received in Jan from Treasury and FDIC on assets acquired from Merrill.

    Between the $45B in direct assistance and the $118B immunization, BoA is right there with AIG and Citi as a ward of the state.

    We now have the absurd spectacle of smaller banks unable to raise capital in the markets being put under, while larger and more dangerous institutions are allowed to survive through accounting tricks, regulatory forbearance, and boatloads of public money. All to keep up the illusion of market discipline and a functioning banking sector. And meantime we have to listen to clowns like Lewis bray about government interference in his so smartly run institution. And no, that idiot didn’t invest in and then later acquire Countrywide out of some kind of public spirit. He was too stupid to know what he was doing on his $2B initial investment and bought the damn thing to save face. The real losses on the Countrywide owned loan portfolio–net of regulatory forbearance–must be staggering.

  4. wintermute

    Advice like “when you are in a hole – stop digging” is a lot easier said when standing on the edge instead of heeding it when in the hole.

    The US government (like all others) have started on a bailout path for solving the credit crisis (dug a big hole). This was after a combination of “expert” advice synergistic with political survival instincts and not wanting to be the captain of the Titanic – if the bad banks failed and really did crash the economy.

    A year later the delayed “stress-test” results is partly because the Treasury now realises the desperation of the bail-out path. This is a straw to cling to for a u-turn. To scale down the bailouts and yet have some justification for the original action after wasting hundreds of billions of dollars already.

    But this change of course is still flawed. BoA having to raise $35bn amounts to being told to bail-out itself. Treasury seems to want the banks to be bailed out now – without committing more money itself. What if BoA simply files for Chapter 11 – which it could have done all along? Then more bailout money would be needed from the FDIC (after itself is bailed out). Systemic risk on the trillions of derivatives then kicks off a long feared chain reaction.

    The Treasury is still trapped by the “too big to fail” problem. After telling BoA to raise $35bn it will have to secretly provide the funds to help them do it – otherwise the money will not be found.

    The stress-test results are likely to bring matters to a head sooner than people think.

  5. Chindit13

    Given that the Stress Tests concentrated on the loan portfolio, and may have found BAC lacking capital to the tune of $35 billion, how much capital would BAC need if the tests also considered their derivative portfolio and OBS waste?

    BAC might end up assuming MER’s worst characteristics, like repeatedly coming back “one last time” for capital.

    And if the “worst case” scenario is exceeded?

  6. Independent Accountant

    This looks like more of the continuing kabuki dance. The BofA needs more than Citi? I don’t believe it. This number is likely Fed retaliation for Ken Lewis “outing” the Bernanke-Paulson squeeze which led to the non-disclosure of Merrill’s losses.

  7. DownSouth

    @Independent Accountant,

    I’m with you.

    My guess is we have is a criminal banking class being regulated by a criminal regulator class.

    In this netherworld, it’s impossible to know what is really going on.

  8. carol765

    at chindit13

    ¨In calculating the capital buffers, regulators accounted for off-balance sheet units that banks will be incorporating in 2010 as a result of proposed accounting rules changes. Banks may bring on about $900 billion to their balance sheets as a result of the change, and supervisors boosted the risk-weighted assets in their assessments by $700 billion, the Fed said.¨ source: bloomberg.

    So, it is not as bad as you fear.

  9. haljett

    Interesting how this info is being leaked. I think we should wait for a bit more info before making some judgments on how hard the gov was on their stress tests. Could easily say that they BofA actually needs twice that amount but tests were designed to lessen it.

    I continue to be concerned at how the gov is taking active roles in businesses and what will result from all this is what will be telling about the future of our economy.

  10. profnickd

    These stories all possess a recurring theme — that the government should “save” the largest banks, with the assumption that they can continue as ongoing concerns.

    The Fed/Treasury and a lot of stakeholders in market think that there is a future for these firms — there isn’t, at least not without either a.) screwing over taxpayers or, b.) screwing over the banks’ creditors/bondholders.

  11. Chindit13

    This one has a few too many twists and turns. If I am reading all of this dribble correctly, it seems BAC will convert—at a favorable rate—$34 billion of the TARP money, leaving it owing the taxpayer only $11 billion. It will then pay back the $11 billion so that Ken Lewis can go back to overcompensating himself for a job poorly done.

    The market seems to love this dilution, either because it is less dilution that was priced in, or because this frothy rally just has people acting the fool.

    The taxpayer loses both the preferred dividend and the semi-senior position in line for BAC’s New Account Complementary Toaster inventory. In exchange it gets a majority position in a bank heavily exposed to a housing market where median home prices are off 50% (CA), mortgages to this market carried on the books anywhere from par to minus 30%, a CRE portfolio just beginning to smell bad, an OBS and derivative position that may or may not have losses far in excess of all of BAC’s capital, and with the very same cast of characters in charge who put the bank in such a miserable state.

    Sounds like a great deal.

  12. AP

    I wish I could run a business like Bank of America. Unfortunately, us peons are nothing more than ‘free’ slaves to our terribly corrupt corporatocracy.

  13. marsha donner

    of course Bof A stock went up today on news that it did or did not need ONLY 35BN (depending upon what you read)
    when the gov’t says no banks will fail (even if they fail the ‘stress’ test)..why not buy the stock?

  14. Carmen A.

    I agree. It makes no sense that the market hurded up. I made the mistake and shorted BAC. I sit at $11.09. I am taking the perverbial “Bath”. For May 7th and continuing I do not know how to trade this mistake. I am wondering if I should sit tight to see if there is a pull back.

    I understand that there is a bull snarl in the works as the market has passed it first resistance of 8000 and on its way to the 8500 resistance. Thereafter it will continue to test the 200 to the 9000.

    I hope that the Friday news is negative on emplyment so that I move out withour ER attention. Does anyone have a suggestion.

  15. carol765

    at Carmen:
    get rid of your short, and do not short again.

    If it leads you to hope for negative news on employment, i.e. even more people having lost their jobs than already expected, than surely something is horribly wrong.

  16. Apple2k

    I don’t understand how they could possibly botched this badly after already receiving federal bailout money. This stress test was designed to show which banks could and couldn’t survive and obviously Bank of America deserves to go. I saw this news coverage of the stress test and it really cleared up some of my confusion:

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