Don Kenobi
/ 83.5.82.* / 2009-05-06 15:54
BAC: More Obfuscation by The Media
An unbelievable spin-cycle of nonsense has been coming from CNBS this morning.
Here's the story that started it all (although originally not on Bloomberg):
May 6 (Bloomberg) -- Regulators have determined that Bank of America Corp. requires about $34 billion in new capital, the largest need among the 19 biggest U.S. banks subjected to stress tests, according to a person with knowledge of the matter.
CNBS is claiming that this isn't really "new capital" in that the preferred already held by government can be converted as part of it.
That's true but if you are a shareholder it doesn't matter!
If you are a stockholder dilution is dilution and it doesn't matter how it happens. As I noted yesterday:
There is no way to "fix" the bank balance sheets without massive dilution. Either you convert preferred to common, you issue new common, or you sell performing (cash-flowing) assets. The first two dramatically dilute everyone holding the common stock and the latter takes a pole-axe to the earnings side of the balance sheet, having the same effect on shareholders as the first two. The recent run-up in bank stock prices, doubles in many cases or more, is not only unsustainable it is something right out of The Three Stooges.
Bingo.
Listening to the idiots in the media, and there are an awful lot of them, will find you driven in the herd - straight off the cliff.
Don't fall for it folks. $34 billion in dilution is $34 billion, no matter how it is achieved. BAC's current market cap (according to Yahoo Finance) is $70 billion (as of yesterday's close), meaning that you will be diluted by about 50%.