Please note - I am aware this note provides a selective interpretation of a New York Times article - and being selective is likely to be wrong.
In The Boxer (from Bridge over Troubled Waters) Art Garfunkel sings that a man hears what he wants to hear and disregards the rest. Like many a good song lyric it holds an underlying truth.
And I risk hearing what I want to hear about Bank of America. I could be wrong. I am long the stock for a few dollars so far – and being long probably have selective hearing. But there are plenty of people intellectually (and financially) committed to the idea that BofA is insolvent – and they are also hearing what they want to hear.
There is a lot of talk about Bank of America failing the stress test. The number that they need to raise varies from more than $10 billion to $45 billion with $34 billion being the consensus number of today. [I round $33.9 to $34 billion - what is a hundred million dollars between friends?]
The New York Times seems to quote original sources … and manages to pin down a senior BofA executive (Alphin) by name. That is better than most papers have done. The usual source is “people familiar with the matter”.
Now here is a quote:
Mr. Alphin said since the government figure [$34 billion] 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.
So lets get this straight…
A while back Ken Lewis was talking about repaying the entire $45 billion in TARP money.
He backed off. He said at the annual meeting that the required capital was not in BofA’s hands.
Now they are talking about repaying $11 billion. That leaves $34 billion – capital which the government says that they need.
This hardly sounds like they need fresh tangible common equity. Just that the TARP money is a decent buffer and will convert if the tangible common ratio falls below some threshold.
This interpretation is consistent with the denials the other day by BofA that they were looking to raise $10 billion.
Incidentally this is way better than I originally thought. The tangible common to tangible assets (not including excess cash balances) is well below 4% now. Even as a long I think some dilution is warranted.
That said - the quality of leaks on the stress test to date has been awful.
And maybe Mr Alphin’s comment is also misquoted. And maybe I am way off base. In my interpretation.
Maybe Simon and Garfunkel were right – it is “all lies and jest”. That is about par for bank accounting and behaviour.