Bank of America Corp (BAC)

[DewDiligence]

“Less than $10B” meant $35B, evidently… this isn’t gonna help Lewis’ credibility.

http://online.wsj.com/article/SB124158058615290821.html

›BofA Faces $35 Billion Gap

MAY 6, 2009
By DAN FITZPATRICK and DAMIAN PALETTA

Regulators have told Bank of America Corp. that the company needs to take steps to address a roughly $35 billion capital shortfall 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, and Bank of America officials either declined to comment or couldn't be reached.

Regulators began notifying the 19 financial companies subjected to the government tests of the results Tuesday.

An official announcement is expected after the close of U.S. stock-market trading Thursday.

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 Charlotte, N.C., bank already has received $45 billion in capital from the federal government, some of it to help the bank cover losses stemming from its purchase of securities firm Merrill Lynch & Co. in January.

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 one of Bank of America's largest shareholder.

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

The company's current stock-market value is about $70 billion.

If the U.S. government ends up with more common stock in Bank of America, it also could test the Obama administration's assertion that banks receiving "exceptional" assistance might face the removal of management or directors.

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.

Still, patience with Bank of America Chief Executive Kenneth Lewis has worn thin, at least with many shareholders, following the bank's steep losses and controversy over Mr. Lewis's handling of the Merrill deal.

Last week, Bank of America shareholders voted to strip Mr. Lewis of his duties as chairman. The company's board has shown no signs publicly that its support for Mr. Lewis is wavering.

The large capital hole at Bank of America is the latest sign that government officials are using the stress tests to send a stern message to struggling banks.

Bank of America executives objected to preliminary findings of the tests, in which the bank was told that it may need to raise more capital.

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.

Bank of America has suggested privately that it views a government stake as its last option, and would purse that scenario only after its other alternatives are exhausted. The bank already is hunting for a buyer for the First Republic banking unit acquired as part of the Merrill purchase, and is considering selling asset-management unit Columbia Management. Sales of those two operations could generate about $4 billion, according to David Hendler, an analyst at CreditSights Inc.

Bank of America also has said that it could sell additional shares it owns in China Construction Bank to address any capital needs. A lockup provision on roughly a third of its stake in the Chinese bank is set to expire Thursday. Executives have discussed the possibility of a new share offering if Bank of America's stock price climbs higher, according to people familiar with the situation.

Paul Miller, an analyst at Friedman, Billings, Ramsey & Co., estimated in a report Tuesday that Bank of America would need $46.7 billion to achieve a 4% common equity to total assets ratio.

The Federal Reserve began briefing the country's 19 largest banks on the results of the stress tests on Tuesday and plans to publish the results Thursday afternoon. The stress tests are a main component in the Obama administration's efforts to shore up confidence in the banking sector and attract private investors back to the banking sector. The tests looked at the ability of each bank to withstand a worsening economic slump through next year, factoring in heavy loss rates in areas such as credit cards and commercial real estate loans. Roughly 10 of the 19 banks, including Bank of America, are expected to need more capital, according to people familiar with the matter.

As recently as March and April, Mr. Lewis insisted that Bank of America didn't need any more capital. But when asked the question at last week's annual meeting, he was more circumspect. "We think we're fine, but it's now out of our hands," Mr. Lewis said.‹