Washington isn't ready to let Bank of America and Citigroup out of the woodshed just yet

10/26/2009 1:11 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Shares of Bank of America (BAC) are under pressure today—down about 5.5% as I write this at 1 p.m.—on a Wall Street Journal report that the bank may have to raise billions more in capital before it can pay back taxpayer bailout funds.

Here’s the problem. Before the bank can replay the $45 billion it borrowed from taxpayers at the height of the financial crisis, federal regulators have to agree that the bank will be adequately capitalized after it repays the money. There’s no point, the government has decided. (and this makes perfect sense to me) if a bank, just to get regulators off its back (and so it can up what it pays to its executives) repays the bailout funds and then finds itself so weak that it has to come back to the government for another rescue during the next financial market hiccup.

In the case of Bank of America, the company borrowed $45 billion in taxpayer money and has raised $40 billion in capital since then. That’s enough, the bank is arguing. Wait a minute, government regulators have said, your credit losses continue to grow and you can’t predict, convincingly, when that bleeding will stop. We think you should raise more capital.

That’s sent the stock down today for two reasons.

First, if the bank has to raise more capital, it will dilute current shareholders, making each existing share less valuable. Second, it’s a vote of no confidence by regulators on management’s assertion that it has credit losses under control.

The “discussion” has implications beyond Bank of America. Citigroup (C) hasn’t paid back taxpayers either. And that bank, like Bank of America, continues to show big losses on its credit card and consumer loan portfolios.

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