Is $33.9 billion enough for B of A?

Shares of Bank of America Corp. (BAC) are rising in early market trading after the financial services firm announced that it raised $26 billion to meet the requirements of the government's recent stress test.

The Charlotte-based company, which needs to acquire $33.9 billion, got $13.5 billion from an offering of 1.25 million shares in an at the market offering. B of A also sold part of its holdings in China Construction Bank, generating a capital gain. These initiatives also benefit Tier 1 common capital by $1.8 billion by reducing the deferred tax asset deduction.

In addition, the banks entered into an agreement with holders of non-government perpetual preferred shares to exchange their holdings of approximately $5.9 billion of preferred stock into approximately 436 million shares of common stock. This results in a total benefit to Tier 1 common capital of $5.9 billion.

Taking the money must be a bitter pill for B of A Chief Executive Kenneth Lewis to swallow. In March, the loquacious executive told the Charlotte Observer newspaper that the company could repay the $45 billion of government capital it has taken by late 2009 or early 2010 depending on the economy. Lewis also raised eyebrows in both Washington and Wall Street by insisting that B of A erred in taking as much money from the Troubled Asset Relief Program (TARP) as it did.

Unfortunately for Lewis, the recent bank stress tests showed that B of A remained in poor shape. Lewis pointed out: "The stress test asks what if the economy does much worse than most experts project. We are working on a plan to submit to the government for such a contingency, which is due by June 8." Other experts also argued that the stress tests were unrealistically optimistic.

B of A still has plenty of options to shore-up its balance sheet.

The company could issue up to an additional 564 million common shares through the exchange of (nongovernment) perpetual preferred shares for common stock. In addition, Bank of America has previously said that it plans to sell nonstrategic assets such as First Republic Bank and Columbia Management Group and to establish joint ventures. In addition to adding capital, these sales would also reduce the need for capital to support the balance sheet.

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