BofA Not Quite Out of Options

Updated from Tuesday, April 28

It should come as little surprise that federal regulators believe Bank of America (BAC) needs more capital to survive the recession, unless you take as gospel the recent public declarations of top executives.

BofA shares closed down 9% to $8.12 Tuesday on concern that federal officials were pushing the company and battered rival Citigroup (C) to build their capital cushions in the wake of government stress tests. The report comes at a particularly bad time for BofA, which is hosting its annual meeting of investors in Charlotte, N.C. Wednesday, at which many will be calling for CEO Ken Lewis' head.

Unfortunately for investors who would like some clarity on the situation, Bank of America has mostly remained mum about its plans to shore up its balance sheet -- except to issue bold assertions of its adequate capital levels and financial strength.

Lewis asserted he was "confident we'll pass the stress test" in a March speech. He followed that up on a conference call to discuss the firm's first-quarter profit beat last week by saying "we absolutely don't think we need additional capital," adding the caveat that "we think we are fine, but again, this is in the hands of the regulators at the moment."

What should investors tell Bank of America Chairman and CEO Ken Lewis?
	Keep up the good work. Resign as chairman, stay as CEO. Thanks for the memories.

If the government's stress tests do uncover capital gaps, management rhetoric may be seen as honest, but flawed. Or it may seem like flagellation and denial aboard a rudderless ship.

One obvious alternative for BofA is to offer new stock or convert some of the government's $45 billion worth of preferred holdings into common shares, but that option would dilute existing shareholders. The firm could also make a rights offering, notes Jonathan Finger, managing partner of Finger Interests, which has launched a campaign to unseat Lewis and some board members. Such a move would allow existing shareholders to participate without diluting their stakes, or to sell rights in the open market.