Bank of America's Capital Requirement To Boost Government Stake

It's looking less and less likely Bank of America will be repaying the funds it borrowed through the Treasury Asset Relief Program (TARP) early, as it had once hoped.

The Wall Street Journal reported that regulators told the bank it needs to address a capital shortfall of about $34 billion based on results of government's stress tests out this week. Bank of America had objected to preliminary findings that it needs to raise capital. An official announcement from the government is expected on Thursday evening.

Felix Salmon, a Reuters blogger, wonders how Bank of America CEO Ken Lewis can survive his latest challenge. Lewis has recently been under pressure from the bank's directors, and his ability to raise cash for the forced capital injection is questionable.

Selling shares to the public certainly won't be enough to reach the required $34 billion, and while Bank of America is currently trying to rid itself of assets like its stake in China Construction Bank, such a sale would only bring in a mere $8 billion at best. Divesting the First Republic banking unit it acquired as part of the Merrill Lynch purchase and the asset management unit Columbia Management would both only generate about $4 billion, according to the Journal.

But what may be the biggest challenge facing Lewis are potential accusations that he's once again sending mixed messages to shareholders. Just in March, the bank's CEO (Lewis was recently removed from his duties as chairman) told the Charlotte Observer that it could repay the $45 billion of government capital it borrowed through TARP by late 2009 or early 2010. Two months later, the thought of repaying the funds early seems nearly impossible.

To Lewis' credit, this is not due only to the new capital requirement, but because the government is tightening its conditions on how TARP money gets repaid. The government may, for instance, require that the bank proves it can issue debt without guarantees from the Federal Deposit Insurance Corporation (FDIC). Banks wishing to repay TARP funds may also have to demonstrate they can raise equity capital from private investors.

In the March interview with the Charlotte Observer, Lewis also said there would be no talk and no need to nationalize Bank of America. Although a full nationalization is unlikely for now, an increased U.S. government stake in Bank of America seems inevitable at this point, albeit largely due to the capital injection requirement and the need to convert preferred shares owned by tax payers into common stock.