Amidst much anticipation and anxiety, Bank of America (BOFA) completed its repayment of the entire amount it owed the American taxpayer under the government’s TARP program. Whether this was a well thought out and planned action or just a strategy to get away from the endless pay regulations and bloodthirsty cries of “break them (big banks) into smaller entities” , the deed is now done. Credit rating agencies such as Fitch have ‘upped’ bofa’s credit rating on this upbeat news…but isn’t this where all the problems started in the first place? Credit rating agencies hastily ‘upping’ credit ratings only to commiserate later?
Out of the $45 billion that BOFA owed on TARP, $18 billion is going to come from selling “common equivalent securities” which will get converted to common stock after shareholder approval. $4billion will be raised through asset sales. During the year, BOFA finalized a deal to sell First Republic Bank for $1 billion (expected value) that it inherited through its acquisition of Merrill. It also sold Columbia Management for $1 billion. As per the bank, it’s tier one common ratio was at a healthy 8.5% after taking into account the impact of all its capital actions stemming from the repayment. $1.7 billion is going to come from the issue of restricted stock to its associates as part of the year end incentive plan….now won’t Feinberg be pleased….aligning employee interests with those of shareholders and all that! Although it will be interesting to see what kind of stock is offered to SENIOR executives once the bank is out of Feinberg’s eagle eye.
Having already announced detailed repayment plans earlier this month, the board at Bank of America can now search for departing CEO Kenneth Lewis’ successor with renewed vigour and confidence. Or can they….?
In May of this year, BOFA was informed by Treasury that it was one of the banks that had failed the “stress test” in a major way. It needed to address a $34 billion capital shortfall. It is hard to understand the sudden change of pace….earlier in the year, the bank is the focus of a $35 billion shortfall in capital, and by the end of the year, it is ready to repay $45 billion from a mix of cash and $19 billion raised from sale of securities.
In addition, even before a detailed repayment plan was announced, analysts expressed disappointment over near future earnings estimates for Bank of America due to “high level of credit losses and uncertain revenues”.
To add to this, Bank of America’s Chief Risk Officer and potential successor to the CEO role, is under scrutiny by New York ‘s Attorney General Andrew Cuomo regarding his role in the bank’s merger with Merrill. Mr Curl is supposed to have ‘no recollection’ of a call he had with company lawyers about a key conversation concerning the merger with Merrill and to which he testified earlier in the year.
The sudden positive swing of bank of America’s fortunes reminds me of a pendulum….its too quick, too steep, wonder when its going to swing back?