BankOfAmerica: If You Don’t Need Capital, Then Why Did You Raise Capital?

A scant two weeks ago, Bank of America’s CEO, Brian Moynihan, repeated multiple times that his bank didn’t need to raise capital.   There were a few caveats, like “as long as we don’t have a multi-year recession environment,” which reminded me of former Merrill Lynch CEO John Thain’s repetitions in the summer of 2008 that his firm was fine as long as things don’t get worse.  Hmmm. What happened there?  Oh yeah – things got much worse, and MER was bought by… dammit.. who was it that bought them… *scratching my head*.. Oh yeah – it was Bank of America!

Anyway, $BAC raised capital this morning, from Uncle Warren, at onerous terms:  Buffett invests $ 5B, gets a 6% cumulative perpetual preferred stock, and also gets warrants for 700mm shares with a $7.14 strike price.  $BAC can buyback the preferred shares at any time by paying a 5% premium for them.

The first question that came to my mind was the one I voiced in the title of this post:  if you don’t need capital, then why the f*ck are you raising capital, especially at such onerous rates?

A friend of mine tried to explain it with a variation on the old mantra: sell when you can, not when you have to – ie, you raise capital when you can, not when you have to.  Just ask Lehman – by the time you NEED capital, it’s too late.  However, if you’re raising capital because you think you might end up in an “I need capital” situation, well, then you need capital!  No one raises capital at rates like this just because they can, but don’t need to.

I think Dealbreaker nailed this whole situation pretty well  – It’s Tommy Boy syndrome again (one I’ve written about numerous times) – mark that box of crap GUARANTEED and then everything will work out… The market will have faith, the sun will shine, kittens will frolic in the fields, etc etc etc.

It’s probably worth pointing out the obvious, here – Warren Buffett buying $ 5B worth of 6% preferred stock and getting 10 year warrants for 700mm shares as a kicker is positively not the same as Warren Buffett buying $ 5B of common stock at last sale – just keep that in mind.

 

EDIT: also from Dealbreaker: BAC’s talking points about, amongst other things, how they have ample capital.

-KD

no positions in $BAC or $BRK

 

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