Never Mind

So I guess it’s all right.

The Stress Testers say Bank of America has to raise $34 billion. But since they already have $45 billion of TARP money, it’s okay, they can just convert the Feds’ preferred shares to common. Presto, now their captial ratio is okay. Crisis over.

But nothing’s changed. They don’t have any more cash. They just reclassified the government’s investment on their balance sheet. But there’s a problem: how do they pay it back? Treasury will have all these common shares (that also vote). If the bank pays back the remaining $11 billion, are they out of the TARP program? I don’t think so. And if Treasury sells its shares later, Treasury will be out of Bank of America, but Bank of America will never be out of the Treasury. What a mess!

Milton Friedman quipped that there’s nothing so permanent as a temporary government program. By converting their TARP funds, Bank of America just made it so.

Douglas R. Tengdin, CFA
Chief Investment Officer
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