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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