Now About Those Test Results, Mr. Lewis

I’m not sure what’s more odd: That U.S. regulators weren’t doing “stress tests” on their banks in 2007 and 2008, or that they now insist on putting the results out for all to see…before the bank in question has taken whatever remedial action was called for.

The news that Bank of America “needs” US$34 billion of additional capital is astounding. The current market cap. is US$69 billion, so diluting shareholders by a third can’t possibly be what it must achieve. Fortunately, “needing” US$34 billion of capital may only translate into incremental equity of US$4 or $5 billion. In reaction, BAC (BAC) was down 11.25% in premarket trading this morning, only to rally 10% higher once investors decided that US$34 billion was less than the bank’s existing US$45 billion of TARP funds on hand.

The New York Times made the stress test out to be a victory of sorts, while the WSJ left investors feeling cold (”New pressure on Lewis“)…did BAC need US$34B of new capital or not?

According to the CAO of BofA, US$34 billion is less than the US$45 billion of TARP funds it had received:

Mr. Alphin noted that the $34 billion figure is well below the $45 billion in capital that the government has already allocated to the bank, although he said the bank has plenty of options to raise the capital on its own.

Do you understand what that means? I sure don’t.

Now that the U.S. Treasury is finally in the diagnosis business, it also needs to adopt that Doctor’s credo: Do No Harm.

Which is a challenge: Banks can’t raise capital without disclosing all material information to their prospective investors, so keeping the results secret wasn’t feasible, either. But, putting them into the marketplace without a viable plan to address their impact may well be an avoidable error.

Comments

[rick12345:]

$34,000,000,000 + $45,000,000,000 = $79,000,000,000 even before they break even. Gee, at $2.8b a quarter that should only take 16 quarters or roughly 4 years to pay back the TARP alone !

May 07 05:12 AM

[Buckoux:]

"Now that the U.S. Treasury is finally in the diagnosis business, it also needs to adopt that Doctor’s credo: Do No Harm. "

It's too late. The harm was caused by the Fed getting the banks, and therefore the US economy, hooked on cheap money and easy credit. The Fed had its chance to reduce the rate of addiction by increasing the cost of the "drug" by not lowering interest rates every time the addicts in the economy had a jones on for more cheap bucks and more borrowing to keep those sub-prime loans and CDS"s coming down the pipe. The Fed, as presumptive physician to the US economy, is guilty of malpractice.

May 07 12:05 PM