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by Derek Loosvelt | May 06, 2009


So says the U.S. government, revealing Bank of America's stress test results. The Feds have ordered the bank to raise $34 billion in capital or say hello to their new biggest shareholder: Uncle Sam.

Failing the government's stress test is yet another blow to the bank, further increasing the strain upon CEO "Chairless" Kenny Lewis' one remaining BofA position. To cover the billions needed, the bank is trying to sell assets, though it appears its assets are neither attractive nor healthy enough to cover all $34 billion; issuing shares to the public might not get BofA quite there, either. Which means the bank would have to hand the Feds (and taxpayers) an additional ownership stake by converting the government's preferred stock into common equity.

On news like this you might expect the short sellers to be sprinting to the market, but so far in trading today, the bank's stock is up 7 percent. That's because along with Bank of America's results, other banks' stress test scores have been leaked, and some of the results point to a banking crisis bottoming out.

JPMorgan Chase, Goldman Sachs and Bank of New York Mellon all reportedly received gold stars atop their exams and are expected to be able to pay back their TARP funds soon (if the Feds allow it). Citi, though, like BofA, will have to raise about $5 billion to $10 billion in additional funds (Citi would've needed more, but it's still going ahead with previous plans to convert some of its preferred stock owned by the U.S. to common).

This is important not only to bank shareholders but also to bank employees. BofA and Citi still appear to be many months away from being able to return their TARP funds, meaning its bankers will be abiding by government-sponsored compensation restrictions for the foreseeable future. JPMorgan, Goldman and BNY Mellon bankers, though, will likely soon be freed of such restrictions. As a result, along with keeping their big revenue making bankers on the payroll, they'll also be able to attract big hitters currently employed by firms still under Uncle Sam's thumb.


Filed Under: Finance