The Bank of America stock offering, which will be used to repay the TARP, went off well, so surely this means the Charlotte bank is on the mend and its finances are sound, right?
Chris Whalen, who is an expert on the banking industry and has a proprietary database that measures the risk of individual banks, doesn’t buy it:
We are reaffirming our “negative” outlook on operating results for BAC….
We…look at the specific transaction proposed by BAC, we see the repayment of government TARP equity and a $20 billion reduction in the overall capital of BAC at precisely the time when the Fed is withdrawing many forms of subsidies for the largest banks. Assuming that BAC can place $18.8 billion in new securities and sell $4 billion in assets at valuations that do not generate capital losses, the consolidated entity ends up with $20 billion less capital on a consolidated basis than today.
Ahem, the point of this exercise was to make sure the banks came out sounder, and did not weaken themselves by paying back the TARP funding. Instead, the reverse is happening. A company that threw a fit to get funding from Uncle Sam early this year is now depleting its capital….so it can pay executives better than if it was on the government short leash.
Scrimping on capital to show better returns to allow for bigger bonuses is looting, and it’s what got us in this mess in the first place. But here the authorities are now enabling this process, because “paying back the TARP,” no matter what the true costs and risks are, validates Obama’s economic programs.