Weird. So late last night, when initial wire reports surfaced saying Bank of America (BAC) would need to rasie an additional $34 billion, it certainly sounded like the bank would need to raise a lot of new cash. Early market reaction confirmed this interpretation, as the stock was off by 10% in early trading.
But the spin machine has now turned the news completely backwards, and if you were tuning into CNBC or just looking at the market right now, you might conclude that it’s all good news.
Well, see, The Treasury holds $45 billion in Bank of America preferred shares, so there’s ostensibly no need for a private raise, when Tangible Common Equity is the metric that the Treasury cares about. Just convert $34 billion of it and voila: healthy bank.
In fact, the NYT report on Bank of America actually had a quote from the company’s Chief Administrative Officer — odd, since these kind of leaks are almost always met with a “no comment” saying that the conversion would leave $11 billion in Treasury-owned preferreds that the bank would like to pay back.
One thing we’re not clear on: If this is how the conversion goes, and the bank does pay off the remaining $11 billion over the next year or so, are they considered to have repayed TARP? How does a bank that’s taken the conversion ever actually repay the TARP?