There were news reports that the government might take as much as 40% of Citigroup (NYSE: C) in exchange for a massive infusion of capital. Will the same thing happen to Bank of America (NYSE: BAC) which many analysts believe has problems as bad or worse than Citi's?
In all probability, the Citi precedent would expand to one or two other large banks as the federal government attempts to cut off panics about their futures which have driven their shares to multi-year lows. Several months ago, Paulson forced several financial firms to take TARP money, even though it it possible that all of them did not need it. He wanted to send the message that the financial system was being recapitalized. In BAC's case, the stock market is indicating that it cannot survive without a lifeline, and the new Administration may want to act on that before the weight of the company's liabilities completely destroys confidence in the institution.
If the Citi investment is a model, it is not one that is all good for shareholders. New money may help underwrite a more healthy balance sheet but it could also bring common shareholder tremendous dilution. In the case of Bank of America, a 40% dilution could bring the stock from $4 to $2.50 which would be back to its 52-week low.
A rescue of BAC, which management says it does not need, would cost current stockholders a bundle.
Douglas A. McIntyre is an editor at 24/7 Wall St.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
Reader Comments (Page 1 of 1)
2-23-2009 @ 8:41AM
BHarrison said...
So, what happened to BAC's CEO's claim several days ago that BAC supposedly does NOT need any additional "bail out" money? This sham of propping up these failed corporations is ridiculous.
The CEOs are gaming the bailout system by claiming that they do not need any additional monies at the same time as the politicians and government are sending them "bail out" monies.
The "cap" that Obama issued against the CEO's salaries and compensation is virtually worthless against the existing CEOs; the "cap" restrictions apply ONLY to CEOs who sign contracts AFTER February 2009 . . . . this is a pathetic facade; it accomplishes NOTHING against the CRIMINAL CEOS who orchestrated and perpetuated the FRAUDS that undermined their corporations and our national economy.