As part of Bank of America’s (NYSE: BAC) plan to repay its bailout funds under the Troubled Asset Relief Program, the Federal Reserve is requiring the Bank of America to decide which businesses it can sell to generate capital by the beginning of the Summer.
Bank of America’s agreement with the Federal Reserve to repay more than $45 billion that it received from the Troubled Asset Relief Program was that the Charlotte-based bank must boost common equity by $4 billion through the sale of some of its assets. The bank also issued $19 billion in securities as part of the deal on Thursday.
Industry analysts suggest that candidate businesses which could be sold are its stakes in a Brazilian bank, money management behemoth BlackRock Inc, and its U.S. Trust Corp. wealth-management unit.
Bank of America disclosed in a regulatory filing on Thursday that it will be forced to sell “identified businesses, acceptable to the Federal Reserve Board, for which we have contracted by June 30, 2010 and which are consummated by the end of 2010.”
Bank of America must sell businesses, rather than loans or a portion of the company’s portfolio of mortgage-backed securities, which had a combined third quarter value of more than $180 billion at fair market value. The Federal Reserve appears to be making sure that lending directly and through the secondary market, will not be hindered by loan sales. The Federal Reserve also wants some of the large-cap banks including Bank of America and Citigroup to shrink in size.
If Bank of America is unable to increase its equity by selling $4 billion worth of businesses, it must raise common equity by issuing new shares of stock which would dilute current investors ownership. Bank of America shareholders have already had their shares diluted significantly this year, so that option may be unattractive for the bank.
The company has already found buyers for two of its units, including its First Republic Bank unit and its long-term asset management business, Columbia Management. However, Some analysts believe that the sale of these two firms will not lead to a significant material gain for the company.