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Bank of America's TARP Repayment: Five Observations


And this isn't the only big deal to be done next week.

Editor's Note: This article was originally posted on our Buzz & Banter (click for a free trial). It's being republished here for the benefit of the Minyanville community.

A few observations about Bank of America (BAC) repaying its $45 billion of TARP preferred stock:

First, "common stock equivalents" means common stock, except for the fact that currently, Bank of America doesn't have enough shares (roughly 15% dilution) authorized by shareholders to be issued.

Shareholders will approve this most likely at the bank's annual meeting in the spring, and will have no choice but to approve it, as the failure to do so will result in massive dilution to existing shareholders.

P.S. -- I wouldn't be surprised to see an authorized share increase that far exceeds what's needed for Monday's transaction so that the bank (and more importantly, the regulators) know that this problem won't happen again.

Second, while common equity is increasing from 7.3% to 8.5%, total capital is coming down -- from 12.5% to 11.0%. And non-insured bank creditors should take note of this.

Third, this isn't the only big deal to be done next week.

Mitsubishi UFJ (MTU) is also placing $12 billion in additional common stock, the biggest share sale by a Japanese financial institution ever. (And in that regard, I wouldn't view the Nikkei's 10% rally over the past five business days as just pure coincidence. Check out the US markets leading up to and following May 6, when the stress-test results were announced and banks first issued stock).

Fourth, I'd note that next week's $30 billion common stock issuance by Bank of America and Mitsubishi compares to $39 billion of new common stock issued by all stress-test banks since May.

Finally, I wouldn't disregard the timing of Bank of America's announcement. No one should be more appreciative of Timothy Geithner's efforts to get this done than Ben Bernanke as he heads to his Senate confirmation hearings.

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