Will The Government End Up With a Huge Stake In Bank of America?

Egan-Jones, a prominent credit research firm, sounded a note of alarm today to anyone who still holds common shares in Bank of America.

Just hours after the federal government announced that it would be dramatically increasing its stake in Citigroup (from 8% to 36%), Egan-Jones released a report in which they forecast the same scenario for Bank of America.

Egan-Jones made a number of points in its report, including:

-Bank of America will likely need $100 billion dollars of equity in the next 100 days

-this would be in addition to any money and guarantees that have already been promised by the government

A Bank of America spokesman called the report "ridiculous", but is it?

Bank of America and Citigroup were thought to be the two leading candidates for nationalization.

The Obama administration seems to be wanting to avoid outright nationalization. Instead, many feel as though the Citigroup plan will serve as their working model going forward - a much larger stake in the banks (but not a majority stake), an independent Board of Directors at each bank and potential downsizing of the businesses.

Citigroup tanked on Friday (almost 40%), as investors fretted over how much this move would end up diluting their holdings in the company.

Bank of America tanked as well, losing over 25% of its value and closing at $3.95. Clearly there is a worry that the government will apply the Citigroup model to the Bank of America.

Egan-Jones, in their research note, claimed that the government's policies will result in the "killing" of common and preferred shareholders in both Citigroup and the Bank of America.

Kenneth Lewis, the CEO of Bank of America, has repeatedly stated that the company will NOT need any further assistance from the government. This would include the government converting their preferred shares in Bank of America to common shares, which is what happened to Citigroup earlier today.

The market seems to think otherwise. Bank of America, as mentioned, tanked today, and currently trades at $3.95. Clearly the markets believe that Bank of America WILL need further government assistance, and that this will include the dilution of common shareholders of BAC.

According to Egan-Jones, BAC will need a massive equity infusion within the next 100 days, so we should find out the fate of Bank of America soon.

Is Kenneth Lewis right? Will Bank of America not require any further assistance going forward?

This would be great news - but I kind of doubt that it will be the case.

Source: NY Times - BofA May Be Next, Credit Analysts Say

Filed under: The Economic Meltdown