BofA shares soar despite need for $34 billion in new capital

Bank of America shares rose 17 percent Wednesday as investors absorbed reports that the Charlotte bank needs a $34 billion capital cushion after the government's stress test.

Bank of America spokesman Bob Stickler declined comment this morning, saying the Federal Reserve has instructed banks "not to talk about this." The bank's shares rose $1.85 to $12.69.

The $34 billion in capital is higher than many analysts had been expecting, but apparently investors think the bank will be able to produce the funds without an injection of new government capital. The bank has already received $45 billion in federal loans, partly to stabilize its Merrill Lynch & Co. acquisition. That $45 billion loan is in the form of preferred shares held by the government.

The bank should have several options for how to increase its capital levels. It could convert preferred shares, try to raise money from private investors or sell assets. With any of those moves, the government would still have a significant stake in the bank, but they wouldn't require extra taxpayer funds.

If the bank converted the government's preferred shares, they would become either common shares, or something called mandatory convertible preferred shares. The latter are preferred shares that must be converted to common after seven years. That would be a quick way to raise capital, and it would slash the expensive dividend payments the bank has to make to preferred shareholders. However, it would dilute the value of shares held by common investors, and give the government more control over the bank because common shares carry shareholder voting power.

Bank of America also has $33.9 billion in preferred shares held by private investors, which it also might convert to common, said Stifel Nicolaus analyst Christopher Mutascio.


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