So Ken Lewis of Bank of America tells the Financial Times Monday that it was a “tactical mistake” to accept an additional $20 billion in TARP funds in December? According to Lewis in the FT interview, accepting the second round of TARP money made BAC look as weak as other banks, “like Citigroup(C)”. Funny, but that is not what BAC said in January on the BAC 2008 fourth quarter earnings conference call.
On the call BAC said that the additional injection was important because of BAC’s acquisition of Merrill Lynch (MER). Obviously if you are a bank with $1.84 trillion in total assets, and you absorb an acquisition with total assets of $667 billion, you need more capital in order to keep your ratio of capital to assets constant. Which is exactly what BAC said during the call, and I don’t think anyone reading that transcript would have taken BAC’s second TARP injection, in and of itself, as an admission of weakness. It only would have made BAC look weak if people thought that Lewis wanted the funds to shore up weaknesses in the existing assets.
So why would Lewis say this to the FT? My guess is that he knows that people worry about BAC’s solvency, and he wanted to move the discussion away from that by focusing on one small piece of the federal support BAC needs to keep its doors open, hoping people might think that TARP and the need to meet statutory capital adequacy standards was the whole of BAC’s problem. As I noted last week Lewis ended up having to disclose in his 2008 10-k that his loan book was valued by the market at $44 billion below its marks on the balance sheet, and that he still had outstanding, albeit reduced, exposure to CDS (credit default swaps). Moreover he had $100 billion or so in off balance sheet assets in SIVs (structured investment vehicles) of undisclosed quality.
To make the MER acquisition work BAC needed $20 billion more in TARP money and up to $118 billion in federal guarantees against loss on MER’s weak assets. Not that anyone in their right mind would have bought MER without some sort of support, but wait, there’s more on BAC’s list of federal goodies. That would include the previous $25 billion in TARP funds BAC accepted at TARP’s inception, the $60 billion plus in funds borrowed from the Federal Home Loan Bank System to support its 2007 purchase of Countrywide Financial (where Lewis could have waited for CFC to go bankrupt and then bought the mortgage origination business he was after, minus CFC’s loan portfolio), and the untold tens of billions BAC has borrowed from the Federal Reserve under the Fed’s recently established credit facilities. In other words, BAC was already weak before taking on MER and when it did so BAC became even more a ward of the state.
If Lewis eventually pays back $20 billion of the TARP money to the Treasury that would be welcome. But he should not get away with saying, that repaying a mere $20 billion in TARP funds would prove his bank to be a strong firm that poses no risk to US taxpayers. We should be so lucky.