The other day, when rumors had it that the stress tests were indicating Bank of America and Citigroup would both need to raise up to $10 billion each in capital, Paul Krugman theorized that, probably, someone in the administration was leaking the information, in hopes that it might cushion the blow when results were officially released on Thursday. But now it seems the source of said leaks was really just building us up in order to knock us down. Because today we find out the government thinks Bank of America actually needs to raise triple that amount — $34 billion — in order to cushion itself against the recession, executives at the bank admitted to the Times today. Or else.
If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.
It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.
But that would make the government one of the bank’s largest shareholders.
Citigroup, on the other hand, looks comparatively fit as a fiddle for only needing to add a mere $5 to $10 billion to their coffers. Which gives us an idea as to who the rumor-starter might have been. (Vikram.)