Bank Of America: Rumors & Denials

Over the past several days there have been many rumors and “leaked reports” on the need of additional capital by all the banks “stress tested” by the regulators — and by Bank of America (BAC) and Citigroup (C) in particular. This morning, many newspapers have reported that the capital shortfall for Bank of America is $35 billion.

The report appears to be true, given that The New York Times has quoted bank’s chief administrative officer. It also appears that the bank is planning to convert the TARP preferred shares to common equity.

While the amount of shortfall is not shocking, the fact that the bank had recently been denying that it needs additional capital certainly is shocking.

Last week, The Financial Times reported that Bank of America was preliminarily found to be need of more than $10 billion of capital, and that the bank was working on plans to raise fresh funds. The report was termed as “completely inaccurate,” by the bank (well, technically it was inaccurate since the actual shortfall was much bigger).

During the 1Q09 Earnings Call, Bank’s CEO Ken Lewis stated, “We absolutely don’t think we need additional capital.” Earlier in March, Lewis had even said that, “[The] request for $20 billion of government money to prop up its acquisition of Merrill Lynch was a tactical mistake.”

Now there are two possibilities: either the bank’s top management (CEO in particular) was completely unaware of its financial health, or they were hiding the facts from the investors. Both are equally serious issues. The banks are supposed to regularly “stress test” their portfolios, as a form of risk assessment and arrive at an adequate capital cushion to protect against the projected losses.

The bank’s assessment should not have been vastly different from the assessment done by the regulators, given how “un-stressful” the Fed’s stress tests were. And if the former is not true, then the bank’s management is certainly guilty of misleading its investors and shareholders.

The focus now is on other banks being reported to be in need to more capital, including Citigroup, Wells Fargo (WFC), SunTrust (STI) and Regions Financial (RF).

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