Bank of America was one of 10 banks told by the government to raise more capital following the so-called stress test. The government concluded that BofA faces a potential $136.6 billion in losses from troubled loans and investments in 2009 and 2010. The bank’s $34 billion capital shortfall was more than twice that of Wells Fargo & Co. (NYSE: WFC), which had the second greatest capital need.

BofA Chief Executive Officer Kenneth Lewis said Thursday that his company will start closing the capital shortfall by raising $17 billion in common equity, both by selling new shares and converting a portion of its privately held preferred shares into common shares, MarketWatch reported. The bank said this could involve the issuance of 1.25 billion common shares of stock.

The company intends to raise $10 billion by selling off some of its assets, including its First Republic private-banking unit and asset manager Columbia Management.

Citing people familiar with the matter, the Financial Times reported earlier this week that BofA is considering selling an $8 billion stake in China Construction Bank (CCB). BofA currently holds 39.09 billion H shares of CCB, or 16.73% of the company’s total stock capital.

BofA was free to cut a third of its stake as of Thursday, as it marked the expiration of a lockup period for the holding. But as of Friday, CCB had not received any notice from BofA.

“China Construction Bank hasn’t received a notice from Bank of America on the stake sale,”Yu Baoyue, an official at the bank’s news department, told the Dow Jones Newswire.

In addition, Yu said that even if the sale takes place in coming days, he believes “Bank of America will sell down its stake in several steps instead of offloading the holdings in one go.”

When asked if he had any plans to part with any of Merrill Lynch & Co.’s investment banking operations, Lewis said: “Absolutely not.”

In addition to selling assets BofA is “in discussions to terminate and abandon” an insurance policy it purchased from the government to guard against $110 billion in troubled assets. Terminating that policy will would free up an additional $4 billion, Lewis said.

The company also expects to add another $7 billion from earnings and “various other items.”

“Our game plan is designed to get the government out of our bank as quickly as possible,” Lewis told reporters on a conference call. “Frankly, there’s been a lot of noise around our company. We hope these changes will help quiet some of that noise.

Source: Bank of America Planning Stock and Asset Sales to Appease Government Requirements

“Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” Geithner said in testimony to a congressional oversight panel on the government’s financial rescue program.

One of these banks, Bank of America (BAC), the world’s second largest in terms of market capitalization, booked a first-quarter net income of $4.247 billion – 6% more than it made in all of 2008.

So is this the turnaround Geithner et al. have been willing to beggar our nation’s future for?

Before calling your broker and placing a big order for bank stocks based on all this “good” news, it might be prudent to answer a couple questions first.

For starters, just where did all this income come from? And has credit quality really improved?

The answers to both can be found buried in a company press release bearing the encouraging title “Bank of America Earns $4.2 Billion in First Quarter.”

I’d like to draw your attention to the four most telling excerpts from this release.
1. “Equity investment income includes a $1.9 billion pretax gain on the sale of China Construction Bank (CCB) shares.”
2. “Noninterest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening.”
3. “Credit quality deteriorated further across all lines of business as housing prices continued to fall and the economic environment weakened.”
4. Nonperforming assets were $25.7 billion compared with $18.2 billion at December 31, 2008 and $7.8 billion at March 31, 2008, reflecting the continued deterioration in portfolios tied to housing.”
Now we see that out of its $4.2 billion in profits, a total of $4.1 billion came from a one-time sale of CCB stock and marking up Merrill’s book of mortgages. If you subtract these one-time gains from net income and include preferred dividends, Bank of America actually lost $1.286 billion.

As far as credit quality goes, I think number 3 above makes the situation as clear as can be.

Importantly, Bank of America is not the only big bank engaged in accounting sleight of hand.

As The New York Times article “Bank Profits Appear Out of Thin Air” by Andrew Ross Sorkin points out:
With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JP Morgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

So what’s the takeaway?

When the Treasury secretary tells you banks are well capitalized and you read in the press that financial institutions have turned a corner, don’t buy it. And don’t buy the stocks of these companies either.

These days, smart investors are well advised to carefully watch the investment as well as the political landscape… because Washington’s movers and shakers’ influence on the markets has never been greater. The Casey Report investigates and analyzes those influences and trends – to find the best investing opportunities with maximum gains. You can try it completely risk-free – check out our 3-month trial with 100% money-back guarantee. Click here to learn more.

Source: Are Banks Going Bankrupt? “NO!”, say Banks

No timetable or total dollar value for the deal was given. The magazine report was picked up by the Reuters wire service, and by other U.S. media outlets, such as Forbes.com.

To smooth the way for the share purchase by Bank of America, Central Huijin Investment Co. Ltd. – the investment arm of the People’s Bank of China that’s run by the Ministry of Finance – has asked China Construction Bank to audit its third quarter results using international accounting standards.

Caijing, an influential Chinese-language business-news publication, said it did not know how many shares that Bank of America intended to buy. Construction Bank is already 11% owned by BofA. As part of its strategic-investing agreement with Construction Bank, BofA has had the option to increase its stake at an agreed-upon rate of 1.2 times the China commercial bank’s book value, Caijing reported.

Construction Bank’s net asset per share jumped 13.26% from a year earlier to 30 cents (2.05 yuan) during the first nine months, according to the lender’s unaudited third quarter results.
China Construction Bank (CCB) is a state-owned, full-service commercial bank that primarily provides corporate and personal banking services. Additionally, the group offers wealth-management, credit-card and stock-brokerage services. It focuses on two key areas:

• Individual banking services, including deposit services, personal loan, long-credit-card services, long card services, housing system reform finance, foreign-exchange services, securities agent and gold business related services.
• And corporate-banking services,  which include corporate e-banking, deposits, credit business, services for government agencies, services for non-banking financial institutions, international settlement, international financing, fund settlement and fund custody services.

With its headquarters in Beijing, CCB employs about 298,000 people. It recorded revenue of about $19.07 billion in the fiscal year that ended in Dec. 2006, a jump of 17.8% from 2005. The net profit was $5.83 billion in fiscal 2006, a decrease of 1.6% from 2005.

Central Huijin Investment Co., established in 2003, is the investment company owned by the Chinese government. Central Huijin was created to act as the centralizing structure through which the government of China can operate as a majority shareholder of the country’s so-called “Big Four” banks, all of which, obviously, are state owned.

However, Central Huijin does not own shares in the smaller joint-stock commercial banks, as those which are largely owned by China’s local governments. The “Big Four” in China are:

• China Construction Bank Corp.
• Industrial and Commercial Bank of China.
• Bank of China.
• Agricultural Bank of China (PINK: ABGEF, ABGEY).

Central Huijin Investment Co. was acquired from China’s State Administration of Foreign Exchange by the state-operated China Investment Corp. (CIC) for roughly $67 billion. A so-called “sovereign wealth fund” (SWF), CIC is responsible for managing part of China’s record $2 trillion in foreign-exchange reserves. With $200 billion in assets under management, CIC is actually the fourth-largest sovereign fund in the world.

China Investment Corp. officially began operations in Sept. 2007. However, it actually bought a $3 billion stake in U.S. private equity player The Blackstone Group LP. (BX) in June 2007. And it bought a 9.9% stake in Morgan Stanley (MS), worth about $5.5 billion at the time, in December 2007.

Caijing, the independent, Beijing-based magazine that broke the BofA story, is a financial publication in that’s devoted to coverage of companies in China. The title actually means “Finance and Economics Magazine.” Caijing says its mission is to have an “independent standpoint, exclusive coverage and unique perspective.”

By most accounts, it’s been succeeding.

The Wall Street Journal called Caijing “The Leading Finance Publication in China,” while Wikipedia said the magazine’s “unique perspective and sharp writing have led to it receive enthusiastic responses from financial industry experts and casual individual investors alike.”

The magazine’s knack for exposing the darkside of the financial world has helped it to establish itself as an independent, “must-read” publication. Other publications have tried to copy its approach and style – and have fallen short. Caijing is China’s only magazine that has continued to strengthen its reputation solely through investigative reporting.

Source: Bank of America Seeks to Boost Stake in China Construction Bank, Influential China Biz Magazine Reports

Bank of America Seeks to Boost Stake in China Construction Bank, Influential China Biz Magazine Reports

• Bank of America Corp. (BAC) announced yesterday (Tuesday) that it would increase its stake in China Construction Bank Corp. to almost 11%, The Associated Press reported. The Charlotte-based bank plans to purchase 6 billion H-shares on or about June 5th, bringing Bank of America’s total investment in the Beijing-based bank to 10.75%.

• The S&P/Case-Shiller home-price index declined 14.4% from the same period the year prior, representing the biggest decline since the data began to be compiled in 2001. The home-price index has declined every month since January 2007, Bloomberg News reported. Rising foreclosure rates are adding to the oversupply of homes on the market, helping to keep home prices low.

• Vodafone Group PLC (ADR: VOD) announced yesterday (Tuesday) that Chief Executive Officer Arun Sarin plans to step down in July after five years as CEO, MarketWatch reported. The announcement came on the same day that Vodafone announced a record $13.2 billion (6.66 billion pounds) first quarter profit. Vittorio Colao, Vodafone’s deputy CEO and head of the group’s European operations will succeed Sarin.

• Homebuilder Standard Pacific Corp. (SPF) announced yesterday (Tuesday) it would receive a $530 million investment from private-equity firm MatlinPatterson Global Advisers LLC, Bloomberg News reported. Standard Pacific stock has been hard-hit by the housing recession, having lost over $1.4 billion in market value since 2005. “It’s definitely good news,” Matt Wilcox, a bond analyst at KDP Investment Advisors Inc. told Bloomberg. “It certainly gives them additional liquidity and time to weather this housing downturn.”

• Privately-held Switzerland company Landis&Gyr announced yesterday that it signed a deal to set up nearly 7 million “smart meters” in Texas that will allow consumers to manage their electrical consumption, Reuters reported, citing a source familiar with the talks that estimated the deal in the $360 million ball park. The deal comes in the face of rising energy prices around the world and heightened environmental awareness about wasted electricity.

• South Africa’s economy grew a pithy 2.1% in the first quarter, significantly below the 5.3% it moved in the previous three quarters and the slowest quarterly gain in more than six years. “The figures are grim,” Dennis Dykes, chief economist at Nedbank Group Ltd., South Africa’s fourth-largest bank, told Bloomberg. “The consumer side will remain under pressure given the higher interest rate environment and power problems are still a factor. We’re in a cyclical downturn that will extend into next year.”

• Gold futures dipped $18 an ounce to $907.90 in trading yesterday as the dollar regained strength. Another reason could be profit-taking, as gold moved 3% last week, Mark O’Byrne, a director at Gold and Silver Investments Ltd., suggested to MarketWatch.

Source: Global Investing Roundups: Wednesday, May 28th, 2008