As Bank Of America (BAC) Sells CCB Stake, Question Of Dismantling Become More Important

Bank of America (BAC) is selling part of its stake in China Construction Bank for $7.3 billion. That will help the US institution to raise capital it needs to fill the $34 billion capital gap that the US government says that it has based on “stress test” results. But,  B of A is also giving up a valuable asset–a piece of a major bank in the world’s fastest growing large economy.

The Bank of America decision and the government pressure behind it raises the issue of whether large American financial institutions are being forced to sell assets which may be of substantial benefit to them in the years ahead. Citigroup (C) may also have to divest some of its units to raise cash, especially if it cannot get money from the capital markets. Businesses like its overseas retail operations could bring in new money, but that would also rob Citi of a major source of future earnings, earnings that would help the bank improve its capital base.

The federal government may be getting what it wants in the short term, which is to improve the health of bank balance sheets. If the new public/private program to buy toxic assets from banks works, the financial positions of big banking firms may get even better. But, there are still a number of questions about the extent to which private equity wants in on the program.

Banks are still faced with large consumer credit and commercial real estate write-offs. The value of mortgage derivatives on their balance sheets could still continue to fall. The money being raised by banks now as a by-product of the “stress tests” may be inadequate, which will put them back knocking on the Treasury’s door at the end of this year or the beginning of next.

The head of the FDIC and other federal officials say that the largest banks are too complex to be run properly and that the complexity carries risks that are not acceptable. The solution is to auction off the parts of the banks which will bring them down to size, a reasonable size based on the government’s measure. In the meantime, assets like a stake in China Construction Bank which may have tremendous value in the future get moved off of balance sheets in the name of mitigating risk. Instead, it undermines opportunity.

Douglas A. McIntyre