Wednesday, May 06, 2009

Cut The Losses

This headline is perhaps the scariest business headline of the past six months:
May 6 (Bloomberg) -- Regulators have determined that Bank of America Corp. requires about $34 billion in new capital, the largest need among the 19 biggest U.S. banks subjected to stress tests, said a person with knowledge of the matter. Bank of America fell 9 percent in trading before U.S. exchanges opened.

Citigroup Inc.’s shortfall is more limited because the company already plans to convert government preferred shares to common stock, people familiar with the results said. JPMorgan Chase & Co. doesn’t need a deeper reserve against losses, according to people familiar with that company’s result.

The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Federal Reserve publishes the stress tests results tomorrow. Companies requiring more capital could raise all the funds through conversions of preferred shares if they choose, the people said.

Sources I've spoken to who have some limited knowledge of the results of the stress tests tell me that roughly half the banks tested will need further bailouts, but BofA is the largest eyesore on the horizon.

Mr. President, Chairman Bernanke, Secretary Geithner, the time has come for triage. Bank of America, for example, has already benefitted from bailouts to the tune of $45 billion dollars. It's clear that it cannot possibly raise another $35 billion on its own, it will rely heavily on government help.

And other banks similarly positioned will be chomping at the bit for a handout. It is time to look at a guided bankruptcy, similar to the one Chrysler filed last week and GM will likely file before long.

This will mean, in the case of BofA, writing off the $45 billion dollars. Better to take the hit now, and work out an arrangement with the new owner of Bank of America for an equity stake over a longer term than anticipated.

Bank of America is a singular case in this instance. Had it not been greedy and purchased Merrill Lynch (at the complicit urging of the Bush administration, we should point out), it likely would have survived its earlier greedy decisions to consolidate the purchases of MBNA, Fleet Bank, US Trust, and its most questionable purchase, Countrywide Financial, just ahead of the sub-prime mortgage crisis of which Countrywide was a, if not the, main player.

It's one thing when a bank gets its clothes dirty playing in the mud of securitized debt obligations and unhedged risk plays. It's another when a bank goes out of its way to collide with the earth.

Or to put it in a clearer idiom, it's one thing to get behind the wheel when you've had a beer, quite another to get behind the wheel drunk and carrying a six pack to consume on the way.

My sense is that Bank of America needs to be reorganized and then recapitalized with a different charter. Indeed, perhaps we ought to rethink the entire banking industry so that there is some safe place for the average American to put his money.