Bank of America’s TARP repayment – Ken’s last act

a surprise escape from government clutches

Published on The Economist, December 3, 2009.

… If paying the TARP money back is designed to hasten an appointment, BofA’s new boss (tipped by many to be Greg Curl, the bank’s chief risk officer) already carries a very heavy price tag. The repayment will be funded by $26.2 billion in spare cash and by a huge $18.8 billion capital-raising. Despite the prospect of dilution, shareholders reacted positively in after-hours trading. The government will be pleased, too. The repayment is another milestone in its staged retreat from the banking industry. That in turn will make it easier for the administration to persuade Congress to extend TARP beyond the end of the year. Tim Geithner, America’s treasury secretary, reminded members of the Senate Agricultural Committee this week that America’s small banks still faced threats. 

BofA is not out of the woods either. The bank’s projected post-repayment capital ratios look sturdy enough, but credit losses remain high. Its third-quarter results presumed a peak in unemployment of around 10%; the jobless rate has already exceeded that figure. Accounting changes will bring about $125 billion of off-balance-sheet assets back on to BofA’s balance-sheet early next year, straining capital.

Mr Lewis will soon leave these worries behind. Paying back TARP
achieves one of his long-standing goals (though the government will still hold warrants in BofA). Another, integrating the acquisitions of Countrywide, a mortgage lender, and Merrill, remains unattained. The BofA boss deserves much of the criticism that has come his way. But with the government out of the executive suite and Merrill delivering solid results, he will bequeath a bank with a plausible future. (full text).

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