Bank of America Corp. stock rose as investors appeared comforted by reports that the bank has the means to cover a potential $34 billion shortfall in capital.
The New York Times and The Wall Street Journal are reporting that regulators are telling the Charlotte, N.C.-based bank it needs about $34 billion in capital based on results of government “stress tests.” The New York Times quoted a bank executive, while the Journal report cited unnamed people familiar with the situation.
Bank of America declined to comment on the reports. The Treasury Department also declined to comment.
Shares of Bank of America rose 81 cents, or 7.5 percent, to $11.65 in morning trading.
Bank of America has been among the hardest hit banks by the credit crisis and ongoing recession. It has received more than $45 billion in government aid already, and has come under heavy scrutiny in recent months for its acquisition of Merrill Lynch.
The need for more capital comes as the government gets set to release the results of stress tests on Thursday that it completed on 19 banks to determine how they would fare if economic conditions worsened. Any of the banks that are deemed to need more capital based on potential future losses will be required to address the capital situation immediately, to ensure they have the necessary protection if the economy worsens.
Banks will have an opportunity to raise the funds on their own before the government steps in to help support them.
For Bank of America, the $34 billion shortfall could be covered in multiple ways, including converting a portion of the government’s $45 billion investment into common stock.
But Bank of America’s chief administrative officer, J. Steele Alphin, said in the New York Times report that the bank would have plenty of options to raise capital before it would need to convert taxpayer money into stock.
Currently the government holds preferred shares in Bank of America for its investment. Preferred shares are essentially a loan that pays out a hefty dividend. By converting that investment to common stock, it would expand Bank of America’s equity base to help lessen the blow if loan losses continue to pile up amid the ongoing recession. Bank of America would also see the dividend payments to the government eliminated, freeing up more cash to cover potential losses.
At the same time, a conversion to common stock would leave the government as one of Bank of America’s largest shareholders, a move that might not be welcome by investors or the board of directors.
Other options for Bank of America include selling some of its assets to raise the necessary capital or a traditional common stock offering.
Very few banks have been able to complete traditional common stock offerings amid the credit crisis, though with a recent surge in the market in the past two months, investors are becoming more receptive to the idea. Goldman Sachs Group Inc., which is one of the other banks being reviewed by the government and considered one of the strongest amid the market turmoil, raised capital in a stock offering last month.
Bank of America could also shed assets, such as a portion of its stake in China Construction Bank. A lockup provision expires Thursday that would allow Bank of America to sell about a third of its stake in the Chinese bank, which could fetch about $8 billion, according to the Journal report.
Bank of America has been under intense scrutiny in recent months for its acquisition of New York-based investment bank Merrill Lynch. As part of the $45 billion Bank of America received from the government, $20 billion came in January to help cover mounting losses at Merrill after Bank of America showed trepidation about completing the deal.
Last week, amid shareholder unrest about the Merrill deal, investors voted to split the roles of chairman and chief executive, stripping Ken Lewis of the chairman’s position. He still remains CEO.
Copyright 2009 The Associated Press.