Money Matters - Simplified

Bank of America's Big, Fat, Gaping Hole

"We're not expecting to need more capital" said Bank of America (NYSE: BAC)
CEO Ken Lewis two weeks ago. "Will some [banks] be required to convert
some of their preferred to common? We don't think we have an issue
there."

Unfortunately, your bosses in Washington feel quite differently, Ken.

Already widely expected to be short on capital, the hole blown in
the side of B of A's balance sheet now appears bigger than many
expected. When the Treasury's stress test results are announced tomorrow, the bank might be forced to raise as much as $34 billion in capital, according to The Wall Street Journal.

And just like Citigroup (NYSE: C) earlier this year, a solid chunk of that capital
is likely to come from converting government-owned preferred shares
into common equity. That'll strengthen tangible common capital, but
come at the price of seriously diluting existing shareholders. Some
capital could be raised by selling assets, but that's always easier
said than done, especially when we're talking about big numbers in a
down market -- just ask AIG (NYSE: AIG).

Meanwhile, the WSJ is also reporting that JPMorgan Chase (NYSE: JPM) and American Express (NYSE: AXP) will not be forced to raise capital. Goldman Sachs (NYSE: GS) also looks comfortably immune from forced capital raises.

But what's it all mean for B of A shareholders? Two things:

  • Your stake in the company will likely be substantially diluted.
  • Uncle Sam will probably become one of -- if not the -- largest shareholder.

That last point could have a big impact on B of A's management structure. Last week, the New York Post reported that the government might fire
Citigroup's CEO, Vikram Pandit, after the stress tests were completed.
About to become Citi's largest common shareholder, it can swing its ax
and make high-level changes like that with relative ease.

Even more ominous was a comment from Treasury Secretary Tim
Geithner, who told CBS News in early April, "[If] banks need
exceptional assistance in order to get through this, then we'll make
sure that assistance comes with conditions ... and where that requires
a change of management of the board, we'll do that."

Copyright © 2009 Universal Press Syndicate.