Markets around the world cheered for Bank of America's (BAC) announcement that it will repay its TARP subsidy. Analysts praised the decision, saying it shows BofA is on the road to health. And when you look at the ratios, the bank looks healthier than others when they repaid their TARP with a Tier 1 capital ratio of 11% and a Tier 1 common ratio of 8.5%.
Bank of America executives are even more excited, because now there will be less control of the bank's compensation packages, making it easier to offer salaries and bonuses that compete with the other non-TARP banks. Clearly Wall Street is much closer to being healed than Main Street, thanks to the government bailouts -- but the big question is why has Wall Street received so much help to fully recover while Main Street is still struggling to pay the bills?
Out from the TARP
BofA needs to repay $45 billion in bailout funds. It plans to raise the funds through a stock issue of $18.8 billion, with $26.2 billion in excess liquidity. It will also issue $1.7 billion in common stock to employees and sell $4 billion in assets. BofA will need shareholder approval to sell the stock, because it must dilute existing common stock by roughly 10%.
Once BofA raises the funds and pays off TARP, the government will have less of a direct role in all but three of the too-big-to-fail banks: Citigroup (C), Wells Fargo (WFC), and PNC (PNC) will stay under the government's wing. But don't expect big changes in Wall Street's multimillion bonuses, even as Main Street struggles with a raising unemployment rate.
Citigroup is most likely the furthest from escaping government control, due to the U.S.'s large ownership stake in it. Wells Fargo and PNC will keep a close watch on BOA's success to determine how they can escape the government's clutches. PNC could probably repay TARP, but it made a decision not to do so.
Wells Fargo has less to repay than BofA -- about $25 billion -- but the bad debts written down from taking over Wachovia smacked its 5.2% Tier 1 ratio -- which is well below the industry average of 7.5%, according to Goldman Sachs analyst Richard Ramsden. So don't expect Wells Fargo to follow BofA's lead anytime soon.
There's no doubt that if BofA can remove TARP control, the bank and its shareholders will benefit. Repayment would send a clear signal that BofA is ready to compete with the other TARP-free banks, like Morgan Stanley (MS) and Goldman Sachs (GS).
But BofA still has one more barrier to complete health: naming a replacement for CEO Kenneth Lewis, who plans to retire at the end of 2009. Shareholders won't have see a clear path to recovery until they know who will take the reins and lead BofA out from under TARP.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and Trading for Dummies.
Investing in Emerging Markets
Learn to invest in a globalized world.View Course »