Sense on Cents

Last evening on NQR’s Sense on Cents with LD (note: you can listen to audio recording of the show from the BlogTalkRadio player in the right sidebar), I proposed that the Obama administration would not release individual results of the Bank Stress Tests. I further added that I thought the administration may encourage stronger banking institutions to channel funds to weaker institutions. In so doing, these stronger banks – such as JP Morgan and Goldman Sachs – may actually take equity stakes in the weaker banks. Will JP Morgan and Goldman bear the entire risk of those equity stakes? Doubtful. Uncle Sam will likely negotiate terms along the lines of other bank bailouts in which a strong bank provides capital but the government bears the brunt of the losses.

As I write this, Bloomberg reports Bank of America is speculated to need another $10-20 billion in equity capital. BofA’s earnings were reported this morning at .44 earnings per share versus an expectation of approximately .03 earnings per share. Analysts are panning the earnings due to the propsects for ongoing increases in credit losses within BofA’s loan portfolio. BofA’s stock is down approximately 8% in early trading.

If BofA does need another $10-$20 billion in equity capital, where might it come from? In my opinion, in a non-public transferral of capital, those funds may come from JP Morgan and/or Goldman Sachs, and would actually be recycled TARP funds.  Effectively, JPM and GS will merely be a conduit for increased government funds injected into BofA and Citigroup, as well. Remember JPM has $25 billion in TARP funds, Goldman has $10 billion.  If BofA took $15 billion of these funds then Citi could receive $20 billion. What would JPM and GS receive in return? I would think these negotiations would be private and not released, although given that the capital provided is public money all information should be released.  (more…)