The Feds are telling Bank of America (BAC) that it needs to raise more cash, though nobody’s reported how much they have in mind. Obviously it’s more than Bank of America wants (or, more likely, is able) to raise, since the bank is filing an appeal.
So how much will they need?
FBR believes that BAC will need at least $60 billion to $70
billion to maintain a tangible common equity ratio above 3% at the end
of 2010. We are basing our results on FBR’s stress test under a 12%
unemployment rate scenario. Most major banks will find it very
difficult to raise that kind of capital in today’s environment, and we
believe the first line of defence would be to convert both private and
TARP preferred to common equity. FBR encourages BAC to convert the $27
billion of private preferreds as soon as possible, as this will boost
the tangible common equity ratio to roughly 4.3% today, reduce the
preferred dividend expense, and bring much-needed capital stability to
Bank of America. This is consistent with our Underperform rating on
BAC and $5 price target, equal to 0.5x tangible book value of $10.88.
We expect that the shares will continue to trade at a discount to book
until its capital structure is more stable and the risk of dilution is
If the Fed is still sticking by its 10% unemployment estimate, then presumably they wouldn’t require them to raise quite so much. Note that this strategy of converting preferreds to common is the same thing Citi did last time — though even that looks like it won’t prove to be enough.