BofA: No Timetable on Bailout Repayment

Bank of America told TheStreet.com that there is no specific date by which the firm will repay federal bailout money, belying an earlier report.
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Updated from 1:28 p.m. EDT

Bank of America

(BAC) - Get Report

told

TheStreet.com

on Thursday that there is no specific date by which the firm will repay a $45 billion federal investment through the Troubled Asset Relief Program.

The bank's statement undercut a report in the

Financial Times

on Thursday, citing anonymous sources, that BofA is planning to get out from under the government's wing by November.

"I would say there is no formal timeline," spokesman Jerome Dubrowski said.

Bank of America shares slumped 8 cents to close at $11.41 on Thursday, following a market trend downward.

Dubrowski's statement is in line with earlier comments from CEO Ken Lewis, who said Bank of America will repay the loans as soon as it can, depending on economic conditions and its balance-sheet, given a regulatory approval.

"Our game plan is designed to help get the government out of our bank as quickly as possible," Lewis said earlier this month, during a conference call to discuss results of a government stress test.

The test showed Bank of America, the largest bank in the U.S. by assets, may need $34 billion in additional funds to weather the economic downturn through the end of next year. The sum was far more than other large competitors, like

Wells Fargo

(WFC) - Get Report

,

Citigroup

(C) - Get Report

and

Morgan Stanley

(MS) - Get Report

.

JPMorgan Chase

(JPM) - Get Report

and

Goldman Sachs

(GS) - Get Report

were not required to raise any new capital.

Still, some have seen the strong demand for BofA shares as a signal that the firm is much better positioned to repay the TARP funds sooner rather than later. The bank raised $13.5 billion in new equity through a common stock offering this week.

"

We had not considered TARP repayment a realistic option until 2010," Sandler O'Neill partners analyst Jeff Harte wrote in a report on Wednesday. "However...we believe the prospect of increasing Tier 1 common capital by $40

billion or more prior to November has become more likely and would appear to put a 2009 TARP repayment within reach."

Other analysts were more circumspect, with Goldman Sachs' Richard Ramsden estimating BofA will have to issue $15 billion in new stock between now and 2010 to repay TARP. Credit Suisse's Moshe Orenbuch acknowledged that BofA's capital-raising efforts "provide incremental progress" toward the TARP payback, but called the timing "uncertain."

Of course, Bank of America has not ruled out paying back the funds this year, and wants to get rid of the albatross as soon as possible. His sentiment is shared by CEOs of other institutions, who are bristling at hawk-like oversight of lending and other business practices, as well as strict limits on executive pay. (JPMorgan CEO Jamie Dimon called it the "traumatic TARP experience" earlier this week.)

About $21 billion of BofA's capital-raising efforts have been disclosed so far, representing 61% of required funds. The firm is discussing plans to sell several assets while working to boost operating earnings to plug in the rest of the

capital gap identified by the federal government. It can also convert preferred shares into common equity or take advantage of deferred-tax gains.

When tallying the potential of each of those options, especially if one is optimistic about an economic recovery, Bank of America could easily exceed regulators' targeted amount by November, when it must have the funds in hand.

But even if BofA accomplishes that goal, it's questionable whether regulators will allow the bank to reimburse TARP dollars so quickly. Harte, who is bullish on BofA with a buy rating and $16 price target, noted that while BofA is better positioned to settle up with Uncle Sam, the government's willingness to allow the bank to do so "remains to be seen."

The point of the stress test was to determine how much of a capital cushion the biggest banks would need to get through a starkly worse economic downturn. Results implied that Bank of America's position was the weakest among those 19 firms, making it hard to understand how the bank would be allowed to pull the stuffing out of that capital cushion to pay back government loans.

Certainly, investor appetite allowed BofA and others to raise tens of billions of dollars in the capital markets through debt and equity offerings. But has the outlook for the economy and bank losses really changed that much in two weeks? If they have, it seems to imply that bankers critical of the stress tests were right, and the government's underlying assumptions were widely off the mark.

Lynn E. Turner, a former chief accountant at the

Securities and Exchange Commission

and a managing director at the consulting firm LECG, notes that getting out from under TARP doesn't mean banks are out of the woods. Their capital levels must be sufficient to cover losses on credit card debt, commercial real estate and other commercial loans that have become increasingly problematic.

Turner notes that the International Monetary Fund has predicted up to $4 trillion in worldwide loan losses, of which only about $1.4 trillion has so far been reported.

"It would be unwise for the Treasury to take constraints off these banks only to see them lapse back into trouble," says Turner.