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.