BofA’s state of denial

By Felix Salmon
May 6, 2009

The NYT finally gets one of the stress-test anonymice on the record today, in the person of Steele Alphin, BofA’s chief administrative officer, and what he said is flabbergasting:

Mr. Alphin noted that the $34 billion figure is well below the $45 billion in capital that the government has already allocated to the bank, although he said the bank has plenty of options to raise the capital on its own…

Mr. Alphin said since the government figure is less than the $45 billion provided to Bank of America, the bank will now start looking at ways of repaying the $11 billion difference over time to the government.

For one thing, you can’t just repay the $11 billion if you don’t think you need it any more: before any TARP funds are repaid, any bank needs to have weaned itself off the FDIC’s bank-debt guarantee program, among other conditions.

But more to the point, the minimum amount of tangible common equity that a bank requires under the stress-test is not the same thing as the maximum amount of capital, including preferred stock, that a bank reasonably needs to have. The stress-test capital requirements are in addition to regulatory capital requirements, not a replacement for them. And since the government’s preferred stock does count towards a bank’s regulatory capital, then you can’t just repay it on the grounds that it doesn’t count in the stress-test calculations.

It seems to me that BofA is in some weird state of denial here, where a $35 billion capital shortfall can be considered evidence that it actually has more regulatory capital than it really needs. What’s more, the bank now seems to be happy going on the record with this kind of analysis. Which doesn’t instill in me a great deal of confidence in its management.


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Alphin is stating the obvious, BofA doesn’t need to convert all the $45 bn TARP money, if the shortfall is $34 bn.

Felix, do you have any idea why BAC stock is skyrocketing on this news? It seems to me that $34 billion in dilution is not exactly good news, nor is it “better than expected”. What’s going on here?

I’d love it if you’d write more about the FDIC guarantee. The hypocrisy, some driven by the need to primp for the markets, in saying they’ll repay TARP but, oh by the way, we still want the guarantee.

Posted by jonathan | Report as abusive

Felix, the $34Bn is already counting toward the Tier 1 ratio, so converting it will only affect the TCE. If $11Bn makes a difference for a bank the size of BoA on their Tier 1 ratio being adequate or insufficient, then they would probably need more capital. Point being, $11Bn is probably insignificant for BoA’s ultimate capital position.
Giving up the FDIC guaranty, on the other hand, is something BoA won’t be able to do for some time.

Posted by Rustbelt | Report as abusive

Alphin isn’t a banker. Don’t be fooled by the c-level title. He’s basically the Chief of Spin. Check out his bio here: php?s=20&item=40

It’s worth noting that the NYT got snowjob’d today. Not only did they report the Alphin quotes without checking whether they made any sense, they themselves reported this:

“The government’s determination that Bank of America doesn’t need as much capital as it has already received from taxpayers is an indication that even some of the most troubled banks may not need more government money than has been allocated to them.”

This is spinning bad news good and is not very good reporting.

Li’l help here… I’m very curious to hear how BAC can cover the shortfall by converting a part of the $45Bn they received under TARP.

By my recollection of the 8-K, they didn’t issue convertible preferred stock, but rather plain-old perpetual preferred stock plus some deep out-of-the-money warrants. But even if they did issue convertible preferred stock, how can they force conversion? Conversion is a right of the holder (i.e. Treasury). Sure, some converts have call options that, when the stock price exceeds the the conversion price, are effectively force-conversion options. But this requires two things: a) that the preferreds are callable and b) that the conversion option is in-the-money. Are either true? I thought the preferreds shares (i.e. TARP monies) were only repayable after 3 years, and only then conditional on being repaid with proceeds from a qualified equity issuance. Am I misremembering the terms of the TARP purchases?