As more information hits the press about the amount of money the government will say big banks will need due to the results of “stress tests”, it is already clear that three banks, Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC), will need a total of nearly $59 billion in additional capital.
Bloomberg reports that Wells Fargo (WFC) will require $15 billion to prop up its balance sheet. Earlier reports said that Bank of America will need $34 billion and Citi needs between $10 billion and $15 billion.
The firms will probably not have to actually raise much money. They can negotiate with the government to convert preferred shares into common. The consequences of that action would cause two problems. The first is that common shareholders will be significantly diluted. In the case of Citi, the dilution could be more than 20%.
The other effect of converting preferred to common is that the taxpayers will end up owning what could be a controlling stake in several of the nation’s largest banks. The will leave the government with the dilemma of whether its wants to leave the firms alone or replace their boards and senior officers to monitor whether John Q. Public is getting a good return.
Douglas A. McIntyre
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