Dick Bove, the banking analyst from Rochdale Securities, gave Bank of America (BAC) shareholders a scare when he wrote in a research note that the government would require BAC to raise $45 billion more in common equity capital prior to allowing it to pay back the monies it received from the Troubled Asset Relief Program (TARP).
On the next trading day, BofA’s shares dropped by five percent. Mr. Bove’s note should be heeded as much as the advice that the government will never let Lehman Brothers fail. Bank of America is on the verge of exiting TARP, but only managerial ineptitude could blow the deal. The case is good to let Bank of America exit TARP. Ken Lewis needs to structure the exit in a way that both taxpayers and BAC shareholders will win. I have in the past said that both JP Morgan Chase’s and Goldman Sachs’s exit of TARP would benefit taxpayers. If all of TARP is paid back, BofA’s exit would also benefit taxpayers
If BofA pays back all of the $45 billion of TARP funds, taxpayers win and BAC shareholders win. If they only pay back part, the last $20 billion, both taxpayers and BAC shareholders are the losers. Taxpayers lose because they are stuck with the measly 5 percent dividend shares that are worth less than par. BofA shareholders lose because they are still in TARP limbo with stock in a bank, shedding key employees and customers. BAC can do right by taxpayers and its shareholders by paying it all back and eschewing taxpayer subsidies. No better signal can be sent than paying back the $45 billion all at once. An academic study coming out of North Carolina argues that banks that have repaid TARP have seen their stock prices rally.
The stress tests used the Tier 1 Common equity ratio as its metric of a bank’s health. This is consistent with my solo and joint research that argues that common equity capital is the most important capital for banks to make good lending decisions. If you look at BofA’s Tier 1 common equity ratios as of the end of last quarter, they look remarkably similar to those BofA’s rival JP Morgan Chase (JPM) when it exited TARP in the second quarter.
Using these ratios reported in TheStreet.com, it seems that BofA only needs to raise between $0 to $7 billion to exit TARP. BofA has over $2 trillion in assets. The folks down in Charlotte, North Carolina are being silly by squabbling about a trivial common equity offering to exit TARP.
If BofA’s managers are smart, they will satisfy regulators and mimic their more successful rival JP Morgan Chase in order to leave the government’s embrace.