Bank of America Tumbles To Paulson's Cost Basis Following Report Bank Will Need $50 Billion More In Capital Cushion

Tyler Durden's picture

A few days ago when we demonstrated the most recent bond issuance by Bank of America in which the firm issued $2.5 billion in new bonds, we said "BAC is largely underreserved for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash." Obviously the implication was that a capital raise is imminent. And while we were not exactly expecting the bank to access the equity capital markets (immediately), we knew cash would have to come from somewhere. Sure enough, Bank of America just issued $2.5 billion in 5 year bonds. So just when does the equity raise come? Two questions: is this funding simply to replenish the cash to have a decent Tier 1 ratio, or is the bank merely preparing for a waterfall of litigation now that the seal has been broken?" Well, the reason why the bank's stock just tumbled to fresh multi-year lows, and just on top of John Paulson's cost basis is a report from Bloomberg's Hugh Son which confirms our worst fears about the bank: "Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds." Next up, after investors balk to buy bonds from the firm at preferential rates, is Bank of America coming to market with another equity raise in full confirmation that the emperor is indeed naked... and Moynihan is about to be sacked.

Other highlights:

Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios…The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan’s ability to raise dividends and repurchase shares… “I’m hard-pressed to see meaningful capital redeployment.”…Moynihan has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. That’s based on a 7 percent minimum and a 2.5 percent surcharge imposed by regulators…

Moynihan’s task was complicated after he underestimated how big the capital surcharge would be. The bank counted on 1 percentage point, an assumption based upon “fairly senior information saying that was a reasonable number to use,” Moynihan said in a June 1 conference. The 2.5 percent announced last month means an extra $27 billion burden…Bank of America last month cut its 2013 forecast of its capital ratios under the new rules to 6.75 percent to 7 percent, from 8 percent in April…likely that Bank of America will be left short on capital and be forced to sell new shares…To meet the 9.5 percent standard, the bank would have to hold about $171 billion in capital. That compares with $122 billion for the 6.75 percent ratio…

The lender still faces more mortgage-related costs that may sap capital. The five largest servicers may pay more than $20 billion to settle probes by the U.S. Department of Justice and 50 state attorneys general over shoddy mortgage servicing practices…Bank of America may also have another $5 billion in costs tied to repurchase demands from institutional investors and could face other expenses related to securities and fraud allegations on soured Countrywide loans, the company said.”

The only catalyst that can stop the rout in financials at this point: QE3. We give bank CEOs about one week before they realize this and start the lobbying pressure in front of the Marriner Eccles building.