Bank of America Discussion: No Such Thing as Bad News

Includes: BAC, BAC.PL
by: Ockham Research

The gang on Power Lunch was particularly active today, as the results of the government’s bank stress tests continue to be leaked to the media. The biggest story of today is the fact that Bank of America (NYSE:BAC) will be urged to raise more than $34 billion in capital.

“First of all, I considered this nothing of putting the market’s preferred to common, as it is strictly window dressing. It doesn’t change one dollar the amount of equity capital that Bank of America has on the balance sheet. It denominates it to common — it raises the so-called TGE ratio or the change in common equity ratio…

The important thing on the banks is that the amount that they might have to raise, with the exception of Bank of America, which is far less than the estimates. The dilution is going to be much less than was estimated.” CNBC’s Power Lunch 5/6/2009

Ockham historical valuation BACThis quote from Power Lunch addresses one of the “solutions” to Bank of America’s capital problems, which is to simply convert preferred shares to common shares (click chart to enlarge). This is being bantered about as if the bank will suddenly be adequately capitalized even though it is simply a reworking of capital structure. There would be no new capital provided through a conversion, but apparently that would be enough to satisfy the regulators. This seems to expose a flaw in the stress test, since a simple reworking of the balance sheet would make the bank passable.

As the quote states, the market is moving higher in part because, apart from Bank of America, the results of the tests were not as bad as anticipated. It would make sense to me if financials were up slightly, even Bank of America up slightly. However, it seems strange that Bank of America is up more than any other major financial stock, more than 18% at this time. So let me get this straight, the company is found to have a huge capital shortfall and must raise capital which will more than likely heavily dilute existing shares, and the stock surges. At this point, I have no clue as to what could be construed as negative news for Bank of America right now. Amazing!

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