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Bank Of America Needs $34B In Capital

STEPHEN BERNARD   05/ 6/09 01:56 PM ET   AP

Bank Of America

NEW YORK — Bank of America Corp. stock rose Wednesday as investors appeared comforted by reports that the bank has the means to cover a potential $34 billion shortfall in capital.

"Investors have figured out Bank of America has plenty of options and earnings capacity" to handle any shortfall the government may say they are facing, said Gary Townsend, president and chief executive of private investment group Hill-Townsend Capital Inc., based in Chevy Chase, Md.

Shares of Bank of America rose $1.14, or 10.6 percent, to $11.99 in early afternoon trading.

According to New York Times and Wall Street Journal reports, the government is expected to announce Thursday that the Charlotte, N.C.-based bank needs $34 billion in capital based on the results of its "stress tests" on 19 of the nation's largest financial firms. The New York Times quoted a bank executive, while the Journal report cited unnamed people familiar with the situation.

The stress tests are being used to determine how banks would fare if economic conditions worsened. Any banks that are deemed to need more capital based on potential future losses will be required to address the capital situation immediately, to ensure they have the necessary protection if the economy worsens.

Banks will have an opportunity to raise the funds on their own before the government steps in to help support them.

For Bank of America, the $34 billion shortfall could be covered in multiple ways, including converting into common stock a portion of a $45 billion investment it received from the government as part of the Troubled Asset Relief Program. Bank of America has been among the hardest hit banks by the credit crisis and ongoing recession.

Bank of America's chief administrative officer, J. Steele Alphin, said in the New York Times report that the bank would have plenty of options to raise capital before it would need to convert taxpayer money into stock.

A spokesman from Bank of America declined to comment on the New York Times report, saying the bank has been told by regulators it cannot talk about the stress test results until after they are announced Thursday. The Treasury Department also declined to comment.

Currently, the government holds preferred shares in Bank of America for its $45 billion investment. Preferred shares are essentially a loan that pays out a hefty dividend. By converting that investment to common stock, it would expand Bank of America's equity base to help lessen the blow if loan losses continue to pile up amid the ongoing recession. Bank of America would also see the dividend payments to the government eliminated, freeing up more cash to cover potential losses.

At the same time, a conversion to common stock would leave the government as one of Bank of America's largest shareholders, a move that might not be welcome by investors or the board of directors.

Other options for Bank of America include selling some of its assets to raise the necessary capital or a traditional common stock offering.

Very few banks have been able to complete traditional common stock offerings amid the credit crisis, though with a recent surge in the market in the past two months, investors are becoming more receptive to the idea. Goldman Sachs Group Inc., which is one of the other banks being reviewed by the government and considered one of the strongest amid the market turmoil, raised capital in a stock offering last month.

Bank of America could also shed assets, such as a portion of its stake in China Construction Bank. A lockup provision expires Thursday that would allow Bank of America to sell about a third of its stake in the Chinese bank, which could fetch about $8 billion, according to the Journal report.

Bank of America has also been under intense scrutiny in recent months for its acquisition of New York-based investment bank Merrill Lynch & Co. As part of the $45 billion Bank of America received from the government, $20 billion came in January to help cover mounting losses at Merrill after Bank of America showed trepidation about completing the deal.

Last week, amid shareholder unrest about the Merrill deal, investors voted to split the roles of chairman and chief executive, stripping Ken Lewis of the chairman's position. He still remains CEO.

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Filed by Nicholas Sabloff  |