Bank of America's capital needs already covered
<Government to convert preferred shares, boosting stake in bank
By Greg Morcroft, MarketWatch
Last update: 12:33 p.m. EDT May 6, 2009
NEW YORK (MarketWatch) - Shares of Bank of America Corp. rose Wednesday following reports from federal stress tests showing that the bank's capital needs of more than $30 billion can be covered by converting existing government investments into common stock.
The reports varied on the amounts they said the bank will need to raise. The New York Times, citing a Bank of America executive, pegged the number at $33.9 billion.That's less than analysts and investors had been predicting the firm might need.
The federal government has already invested $45 billion in Bank of America (BAC:bank of america corporation com
News , chart , profile , more, but that investment was in preferred shares and doesn't count toward the type of capital regulators are testing major U.S. institutions for.
According to the reports, the bank could convert the preferred into common shares, and the new common would count toward the required capital. That would, according to the reports, preclude the need for a new investment from the government.
Bank of America shares, part of the Dow Jones Industrial Average, initially fell 10% in the pre-open, but recovered to trade up about 12% Wednesday to $12.13.
"It is conceivable that Bank of America could convert its existing preferred stock, and put the capital issue behind it assuming the economy does not take another significant leg down," Citigroup analysts said in a research report Wednesday.
However, such a conversion would create its own new problem -- namely, making the U.S. government one of the bank's largest shareholders and diluting existing shareholders.
"Our analysis shows dilution could range from as low as 20% to as high as 35%," the Citigroup analysts said of Bank of America.
Citigroup Inc. already made a similar deal, agreeing earlier this year to convert preferred shares owned by the government and private shareholders into common stock. That move will give the government a 36% stake in Citi, making it the bank's largest shareholder.
The New York Times report cited J. Steele Alpin, Bank of America's chief administrative officer, as saying, "We're not happy about it because it's still a big number. We think it should be a bit less at the end of the day."
Reuters reported late Tuesday that Bank of America would need an additional $34 billion in capital, according to an unnamed source familiar with the results.
Meanwhile, Friedman Billings Ramsey analyst Paul Miller was cited in a Bloomberg News report as saying Bank of America and Wells Fargo & Co., which were previously investment banks but changed to bank holding companies during the financial crisis, nor did it include non-banks such as credit-card lender American Express Co.
On a related note, banks that want to return money received under Washington's Troubled Asset Relief Program will have to show that they can borrow funds without government guarantees, making it less attractive for some to free themselves from the government's clutches, the Wall Street Journal reported late Tuesday.
Some banks are keen to return the TARP funds, partly because of strict rules on executive compensation, dividend payments and stock buybacks that were imposed after the investments were made last year in the wake of the September financial crisis.
However, regulators want to make sure that banks are financially strong enough to keep lending before allowing them to return the money.
Regulators are expected to detail the complete set of guidelines on how banks can repay TARP as early as Wednesday, the report said, citing unidentified senior government officials.
One condition will be that banks demonstrate an ability to issue debt without a guarantee from the Federal Deposit Insurance Corp.
The FDIC program allows firms to borrow money relatively inexpensively. Banks have taken advantage of this, borrowing $332.5 billion with the backing of the government since last fall, according to the report.
Greg Morcroft is MarketWatch's financial editor in New York.
marketwatch.com |
