Christmas Comes Early for BofA Shareholders and Taxpayers

by: Linus Wilson

Ken Lewis and company gave taxpayers and Bank of America’s (NYSE:BAC)’s shareholders an early Christmas gift on Wednesday afternoon. BofA announced plans to raise common equity capital of $18.8 billion as early as Monday, December 7, 2009. This capital raise comes with regulatory approval to exit the Troubled Asset Relief Program (TARP). Exiting the bank bailout frees BofA from a lot of government micromanaging.

Bank of America is in a strong position to be a leader in retail and investment banking. Investors should be cheered by their deal to exit TARP. With the government assistance returned, BofA will be better able to retain key employees, find a new CEO, and develop and maintain important client relationships.

Further, taxpayers will earn a nice return from their assistance to Bank of America. My solo and joint research shows that the increased common equity capital will make it more likely that Bank of America will extend loans to credit worthy small business owners, consumers, and home buyers. My research argues that preferred stock does little to encourage banks to make good lending decisions.

After BofA’s latest capital raise (p. 8), JP Morgan Chase will not be the only big bank with a “fortress” balance sheet, as JP Morgan’s CEO Jamie Dimon likes to brag about. In terms of Tier 1 and Tier 1 common capital, after the common equity equivalents are issued and converted, Bank of America will have more capital than JP Morgan Chase.

When the first ten big banks exited TARP on June 17, 2009, I argued that Bank of America was the most likely among the billion-dollar plus TARP recipients to be in the second round of big banks exiting the bank bailout. Taxpayers should be happy that the TARP loans are paid in full with dividends and a nice warrant bonus tossed in.

Further, I urged in September and November that BofA should not just pay back the high dividend TARP preferred stock as was floated in the Wall Street Journal, but that it should pay back the full $45 billion of TARP. I’m glad for taxpayers and BofA’s shareholders sake that its managers chose to shed the scarlet letter of TARP sooner rather than later.

Disclosure: This is not investment advice. I invest in broad-based index funds and do not own individual securities issued by Bank of America and JP Morgan Chase.