{"id":138,"date":"2009-05-06T09:31:00","date_gmt":"2009-05-06T13:31:00","guid":{"rendered":"http:\/\/www.intuitiveinvestor.com\/web\/?p=138"},"modified":"2018-08-23T12:55:35","modified_gmt":"2018-08-23T16:55:35","slug":"big-capital-infusion-needed-at-bac","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2009\/05\/06\/big-capital-infusion-needed-at-bac\/","title":{"rendered":"Big capital infusion needed at BAC"},"content":{"rendered":"

Good morning folks!<\/span><\/p>\n

So the details of the first big stress test of the national banks that I posted about yesterday have been leaked to the public and they regard the U.S.’s biggest bank: Bank of America (ticker: BAC<\/span>).<\/span><\/p>\n

And wow (!) was the amount of additional capital needed by BAC<\/span> large…$34 billion! Frankly, I found the number surprising. Why? Well for starters Bank of America’s market capitalization is about $70 billion. Market cap is calculated as the number of shares of stock of a business x the value per share of the<\/span> common stock. The idea of market cap is that it is a quick way to see what the value of the shareholders’\/owners’ interest is in a business. So the $34 billion of additional capital needed by BAC<\/span> is almost 50% of the value of the company to owners ($34 \/ $70 = ~50%)!<\/span><\/p>\n

So the Feds are saying that Bank of America needs to raise half as much equity capital as it already has and that is likely to be tough. Where does one go to find a spare $34 billion? Where does one go to find a spare $34 billion when the U.S. government just announced to the world that your institution is weak and needs more money? Hmmm<\/span>. Double hmmm<\/span>. It will be fascinating to see what BAC<\/span> does to meet the shortfall.<\/span><\/p>\n

Preliminarily they have revealed some potential sources of capital raising: selling its First Republic banking unit; selling its money manager Columbia Management; selling the shares of China Construction Bank that it owns; and selling new shares of common stock to the public if the value of BAC’s<\/span> stock rises. However, all of this is expected to leave it with a sizable<\/span> shortfall. The last option that BAC<\/span> has is that the U.S. government, as part of its bailout package for the bank, has been issued preferred shares of stock in BAC<\/span>. The U.S. has the option of converting those preferred shares to common shares and that would satisfy the capital increase needed to adhere to the stress test standards. Buuuuut<\/span> the problem is that if the latter two options are chosen by Bank of America they will substantially dilute existing shareholders.<\/span><\/p>\n

What is dilution? Dilution is having a fixed sized pie at the party, but all of a sudden 50% more guests show up, and now everyone’s<\/span> piece of the pie is significantly reduced. Ugh!<\/span><\/p>\n

It will be interesting to see what the financial market response is to this BAC<\/span> news. If the financial markets are up then presumably the potential bad news of the stress test capital requirements is already baked into share prices. If the markets are down then they were not. And if they were not baked into the expectations of the market: watch out! It should be a day worth paying attention to the response.<\/span><\/p>\n

Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Good morning folks! So the details of the first big stress test of the national banks that I posted about yesterday have been leaked to the public and they regard the U.S.’s biggest bank: Bank of America (ticker: BAC). And wow (!) was the amount of additional capital needed by BAC large…$34 billion! Frankly, I […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-138","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/138","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=138"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/138\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=138"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=138"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=138"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}