A Stress Test Shocker: BofA Needs $35 Billion

So much for anchoring. You thought BofA might need $10 billion in new capital? Try $35 billion. Or, in English, lots and lots and lots of money — much more money than the bank could conceivably raise privately.

The first obvious question is “if BofA needs $35 billion, how much does Citi need?”. Which leads straight into the question of how much the other 19 banks need, in aggregate — it’s likely to be a shockingly enormous sum.

The second obvious question is “when will Ken Lewis and Vikram Pandit resign?” — I can’t imagine either of them surviving a forced capital injection of this magnitude.

And the third obvious question is “what on earth does Treasury think it’s doing”, leaking the stress tests in such a ham-fisted way, with each iteration worse than the last.

I don’t blame the banks for being angry. They have hundreds of people making sure that they’re well capitalized; Treasury then sends in a handful of wonks to look over the books and a few weeks later determines that they’re off by $35 billion? That’s quite a shortfall, especially when there’s really no indication that Treasury is better at working these things out than the bankers are.

I fear that in the wake of these stress tests, Treasury will have created an atmosphere of antagonism and mistrust which is going to make it almost impossible to push through the kind of root-and-branch regulatory reform that’s desperately needed. Without the banks’ buy-in, no new regulatory structure is going to work — but right now the banks have every incentive to hide things from Treasury and the regulators, rather than to work with them to strengthen the system as a whole. The stress tests might end up improving the banks’ TCE ratios — but that doesn’t mean they will end up improving the health of the financial system as a whole.

Comments

[morph366:]

According to recent reports B of A may not need $35 billion of fresh capital. Confused?... that was the whole idea.

May 06 08:42 AM

[kruser53:]

The credibility of Ken Lewis has the greatest need of capital.

May 06 09:02 AM

[Obi-Wan:]

Too big to fail?? Or too stupid to allow them to survive??

When they bought Countrywide, they elevated their own problems to epic proportions.....what do you do with someone who makes bad business decisions?

Hmmm......

May 06 09:02 AM

[ACCOUNTANT:]

Not sure what BoA would do with an additional $35 billion of capital. Per 1st quarter filings, they have non-performing loans totaling 2.65% of total portfolio. That works out to about $30 billion, of which $17 billion is reserved.

They generate top line quarterly revenues of about $12 billion, which is suffient to cover 30% loss rates on about $40 billion of loans, or about 3.5% of total loans each quarter.

Translation - they can take 30% losses on 13% of their loans between now and end of year and still maintain their capital base where it currently is. And their loss rates on their bad loans will not begin to approach 30%.

BoA denied looking to raise $10 billion of supposed money a couple of days ago. Not sure i believe the credibility of some of all these "leaks."

May 06 09:02 AM

[kelm:]

The stress tests have been decried by almost everyone as either a sham or ill-conceived. It appears we are getting true transparency. Apply a test according to defined criteria and then reveal the results. Some institutions are in trouble some won;t be. Some will need to plus up their balance sheets a little some a whopping amount. It seems Treasury stated what they were going to do and then did exactly what they said they were going to do. That is rare in government. We should be applauding this.

May 06 09:06 AM

[BigJake:]

BOA stock futures are up 9% as of 9:00am ET too. I dunno if it were me I'd be running for the exits on that stock right now, but I guess it just goes to show I don't know D*CK about the markets...

May 06 09:09 AM

[Mono:]

Kelm-

Agreed. At least this is a step by the government that is tangible and people can see. Unfortunately I think they were painted into a corner and realized that in this lose/lose situation they will have to find a way out. They did not intend for these outcomes to happen but our now trying to do damage control. Also- transparency...maybe..... the descriptions and "more adverse" scenarios in the SCAP are suspect at best. Again, they are trying but only at the outcry of the masses.

Why does it take so much to get so little...our gov needs a makeover

May 06 09:22 AM

[Linus Wilson:]

$34 billion is 1.5 percent of BAC's Q1 2009 10-Q assets. I think that is a reasonable amount of new common equity for regulators to require Bank of America to raise by means of either new issues of common stock or preferred for common conversions. Mega banks with too little common equity will make poor lending decisions and put taxpayers at risk of having to bailout those institutions in the future. See my papers ssrn.com/abstract=1321666 and ssrn.com/abstract=1336288 on this topic.

May 06 09:22 AM

[reluctantQuant:]

As if anyone knows what's going on...
This is totally uncharted territory.
But one thing in banking seems to keep coming back, whether it's a Japanese 80's lesson, or a South American loan/ Commerical Real Estate 90's lesson,

There is a "too big" factor for Bank balance sheets, and capital requirements CANNOT be a linear function. Doesn't keep up with the exponential nature of risk.

Citi in the early 90's had a major problem with its $225 billion balance sheet. So, ten years later - how big was it? Couple of TRILLION? smart. real smart.

--rq

May 06 09:43 AM

[johnnysize:]

Um... are you insane? These were the top underwriters of subprime mortgages...but do you really thing Citibank wasnt slicin and dicin' tranches of CDO 's ? Also, they had one of the largest OTC derivs books around which, when unwound and when counterparty's fail , expose losses.


On May 06 07:15 AM James Wilson wrote:

> The top underwriters in the peak years of 2005 and 2006 were Lehman
> Brothers at $106 billion; RBS Greenwich Capital Investments Corp.,
> at $99 billion; and Countrywide Securities Corp., a subsidiary of
> the lender, at $74.5 billion. Also among the top underwriters: Morgan
> Stanley, Merrill Lynch, Bear Stearns, and Goldman Sachs.
>
> NOTICE ANYTHING MISSING ?????
>
> CITIBANK WAS NOT ONE OF THOSE WHO CREATED THE PROBLEM !!!!! They
> bought some securites from New Century but Citi did not make a lot
> of SubPrime Loans.

May 06 09:56 AM

[BigJake:]

I fold. This Bear has grown horns, long tail and hooves. Buy with a capital B if $34 billion is capital is needed at BOA and its stock is up 11%. BUY. Why not, everyone else is doing it, we're in recovery and the recession is over!

May 06 10:01 AM

[Trane250:]

On May 06 07:15 AM James Wilson wrote:

>
> CITIBANK WAS NOT ONE OF THOSE WHO CREATED THE PROBLEM !!!!! They
> bought some securites from New Century but Citi did not make a lot
> of SubPrime Loans.

Maybe so, but they made a lot of stupid loans nevertheless. I believe that they took a 3 or 4 billion dollar haircut on a loan made to a Russian Oligarch named Leonid Blavatnik to enable the company that he controlled to buy Lyondell Chemical Co. Lyondell is now in bankruptcy court and the loan is a total loss.

May 06 10:43 AM

[BigJake:]

I couldn't hold the line any longer. I fold. If $34 billion isn't enough to stop this rally, nothing will. the government will print and the banks will accept and all will be well. I'm jumping into bed with Cetin & Goldilocks today.

May 06 11:00 AM

[BerkeleyBob:]

I must have missed the memo, but it's a little hard to see how much "transparency" there is if the criteria for the stress test are not public. Does look like all the major banks (except JPM?) took advantage of the softening of mark to market accounting standards to improve short term balance sheet, but that simply defers the large smelly problem of bad loans. Ken Lewis is as short-sighted and deluded as Mozilo, Greenberg and add your favorites in a long, dismal list.

May 06 11:45 AM

[ain't no fo...:]

I'm puking at the image that presents.


On May 06 11:00 AM BigJake wrote:

> I couldn't hold the line any longer. I fold. If $34 billion isn't
> enough to stop this rally, nothing will. the government will print
> and the banks will accept and all will be well. I'm jumping into
> bed with Cetin & Goldilocks today.

May 06 12:33 PM

[Old Rick:]

According to reports on CNBC and FOX Biz, the $35B is an "if" number. IF the recession gets much worse; IF ALT-As start massive defaults; IF..IF..IF. Also according to both sources, Treasury (that great bastion of honesty and forthrightness) changed the "rules" of the stress test in the middle of the game. It seems that the real purpose here is to allow the Obama administration to inject added capital by converting preferred to common, thereby getting voting rights and board representation. If you don't think this is a salvo in the fight to nationalize the big banks, you should reread your "Rules for Radicals".

Beware the eloquent liar!

May 06 02:33 PM

[henarl:]

Seems like the public relations aspect of the "stress test" is coming unglued. It's now more of a stress test on the public than on the banks. What we really need is a stress test on the Fed and Treasury.

May 06 03:21 PM

[Ranger:]

I rarely listen to anything you have to say anymore. You are almost a contrary indicator.

May 06 05:27 PM

[Econ 101:]

This is just the Tsunami wave pulling back from the shore and you are all running down to pick up the pretty shells left exposed.

This government are socialists hiding behind a facist cloak. They are letting the big banks suck up the money before killing them.

This is Mao and "let 1000 flowers bloom."

May 06 08:38 PM

[rogerk2:]

Seems to me the whole premise of rating a bank's future health on shareholder assets is flawed. A very large percentage of the bank's current "float" shareholders are fast-money traders. If the bank's share price starts falling, there will be a quick landslide of hedge funds and other speculators heading for the exits ... and loading on shorts.

How many pension funds, college endowment funds, mutual funds, stayed long the banks all the way down? If they did, their shares are worth pennies on the dollar. How much of the new money going into banks this year so far has come from these big funds? Not a lot yet, I suspect. Most of the new money is speculation ... and it'll be gone in a flash at the first whiff of bad news.

If a bank is forced to raise $10B more shareholder assets, and $10B worth of speculators sell the news, doesn't that mean the bank has to find $20B instead? That's why the spec players will dump all at once and immediately go short.

May 07 02:32 AM