In a move that would have its founder, A. P. Giannini, turning over in his grave, the Feds have told B of A that it is undercapitalized to the tune of $33.9 Billion – the amount that the Stress Tests have indicated is needed if the economy takes a turn for the even worse.
B of A could raise this capital by converting the non-voting, preferred stock that it gave the Federal Government in return for the $45 Billion in BailOut bucks it has received through the TARP program (courtesy of your tax dollars and mine). By converting that preferred stock into common stock, the US Government would become one of B of A’s largest shareholders, thus adding to the Fed’s growing portfolio of investments into troubled banks and other financially connected companies as we continue to navigate through the wreckage of our once booming economy.
And, miracle of miracles, this news actually brought about a rise in B of A’s stock price Wednesday – B of A shares closed at $12.65, up $1.81 per share, or 16.70%, as of 4PM Wednesday – still a far cry from its 52-week high of $39.50 on September 19, 2008, but, reassuringly higher than its 52-week low of $2.53 on February 20, 2009. But, don’t kick yourself too hard for not buying B of A stock on February 20; B of A has not, based on Wednesday’s news anyway, reached a safe harbor from the stormy financial waters quite yet.
What caused B of A’s stock to rise Wednesday was the news that B of A has plenty of tricks left up its sleeve for raising the nearly $34 Billion in capital that the Fed says it needs to make it through the rest of this economic crisis. B of A has certainly come a long, long way from its humble origins.
Nearly one hundred five years ago in San Francisco, one Amadeo (“A.P.”) Giannini founded what was then known as the Bank of Italy. His bank catered to immigrant communities – starting up in October 1904, as a bank for the “little fellows” — the hardworking immigrants that other banks simply ignored – especially the Italian population of that city who were used to keeping their cash stashed under the mattresses on their beds and did not trust banks. Giannini was a brave, bold innovator – when other banks kept banker’s hours and closed at 3PM, too early for his hard-working immigrant clientele to get to the bank, Giannini kept his banks open until 9 or even 10PM, so that his worker-clientele could make their deposits.
When San Francisco was rocked in 1906 by the huge earthquake which laid waste to most of the city, Giannini somehow managed to get all of the money deposits out of his still little bank and spirit them away to a safe place before the fires consumed so much of the city. Giannini had been raised by another family after his father had been shot dead trying to collect a $10 debt – perhaps this toughened him up for his famous destiny. Bank of Italy grew, and grew fast, into the innovator in branch banking and, well, the rest is history.
A.P. Giannini would, of course, be at a complete loss to understand today’s world or Wednesday’s news. He would marvel at how big B of A has now grown and how it absorbed both Countrywide and Merrill last year, albeit under some pretty strong pressure from the same Federal Government which now might just become B of A’s biggest shareholder. Countrywide sank quietly beneath the waves recently and the name will not go on among the living although B of A has absorbed it’s home loan lending structure and will run it under the B of A banner.
Some are hailing the fact that B of A needs to raise some $34 Billion in new capital, this being well under the BailOut /TARP amount of $45 Billion, meaning that B of A may not need any more BailOut bucks from your taxpaying pocket and mine too – having deciding that this is good news and that maybe, just maybe, the worst is over. But, not to be the ‘party pooper,’ it also may be too early to make this call, as we still do not have a good handle on exactly what is on the bank’s balance sheets.
The recent news of bank profits is partly a trick of accountants and accounting rule changes plus the injection of those BailOut bucks. Will the giant banks like B of A be able to stand on their own two feet again, finally? It may be a bit too early to take much comfort in deciding that they can. Also, there is a scenario playing out behind the scenes where the top brass at B of A are negotiating right now with the Feds about the nearly $34 Billion number as being too high, so we cannot even be sure of that for now.
Then there’s Citigroup, which has already decided to allow the Feds to convert their preferred stock into common stock, thus further expanding the US Government’s portfolio into the banking biz. But, that story is for another day.