On Thursday, the federal government released the results of the stress tests that it recently ran on 19 banks. While many banks were essentially given a pass, at least seven will need to raise additional funds if they hope to weather a worst-case economic scenario. Bank of America (BAC), with a $33.9 billion capital shortfall, was found to be the weakest of the bunch.
According to the test, BoA's tier-one common equity would be insufficient to weather two years of the worst-case economic scenario. The company is already working on a contingency plan to raise funds, and CEO Kenneth Lewis is confident that it will be finalized before the June 8 deadline. The plan would need to be implemented by November 9, another deadline that Lewis seems confident in his ability to meet.
In order to raise the money, BoA plans to sell common shares and divest some of its businesses; these may include the Columbia Management mutual fund group and California's First Republic bank. Another potential source of income may be the company's improved pretax earnings. Beyond that, Wall Street's exuberant response to the news suggests that BoA may have a great deal of leeway with investors.
Given its need for a massive influx of capital, BoA seems to have, at best, barely passed the stress test. However, there is much to be said for the company's attitude and its impressive ability to spin the news. Lewis was very quick to establish that he has a plan for raising the additional funds; moreover, he also made it clear that he intends to stick with BOA through the current crisis. Given last month's calls for his ouster, his confidence is almost astounding, and seems somewhat contagious.
Another key element that mitigated the difficulty of the news was BoA's quick assertion that it will not need any further government assistance. In fact, despite an initial drop in early-morning trading, BoA closed yesterday at $13.51, its highest price in four months.
Overall, the message of the stress tests seems to be that, contrary to the old saying, no news is not good news. In fact, as the actual parameters of the economic crisis become clearer, the market appears to be gaining confidence. Maybe there is something to this transparency stuff, after all.
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