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Stressing Out Bank of America

I’m late in getting around to the fact that stress tests will reveal that Bank of America needs $33.9 billion but fortunately that lets me observe that contrary to the tone I’ve seen in some commentary about this, I don’t really think BofA management is going to be sweating much:

If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.

It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.

But that would make the government one of the bank’s largest shareholders.

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One thing to note is that to some extent this would just amount to recapitalization by accounting convention. When the preferred shares were purchased months ago, that was described as new capital. Now we’re saying we’re going to revoke that description, and thus allow the conversion to count as new capital. The government owning all those common shares would, meanwhile, amount to a partial nationalization of Bank of America. But if you look at what’s happened since the government became one of Citi’s largest shareholders, it’s pretty clear that the administration has no real desire to be an active shareholder. A conversion would be bad for incumbent Bank of America shareholders because their stakes in the company would wind up badly diluted, but unless the administration has a dramatic change of heart and decides it wants to start treating bankers the way it treats car executives and auto workers, the managers and traders and so forth should be in fine shape.