Crunchy Numbers

D-Day does the math on Bank of America.

It really has been comical to see the leaks of the stress tests trickle out, first with full confidence in the strength of the banks, then less, then less, and now a situation where Bank of America needs $34 billion dollars. Their total market capitalization right now is only $70 billion. The word "insolvent" comes to mind.

The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank.

If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.

It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.

But that would make the government one of the bank’s largest shareholders.

The company has certain assets they could sell, if anyone's in the market for a bank right now. But the most likely scenario makes the US government a near-controlling interest in Bank of America. Citigroup, which already has converted government preferred shares to common stock, needs an additional $10 billion or so, according to this report. It's not all that reassuring to hear BofA spokesmen claim that they'll be able to make $30 billion a year in income once the recession clears, which I think is more than Exxon.

In other words, BoA is worth $70 billion. It already owes $45 billion in taxpayer TARP funds. It needs $34 more billion from somewhere to continue to operate. Last time I checked, that means Bank of America owes $9 billion more than the entire company is worth.

This makes the largest bank in America basically insolvent right now...and yet the bank's stock is actually up over 10% right now, giving it an extra $7 billion on its market cap. People see a bank that is insolvent as a buying opportunity. After all, it can't fail. The government will throw money at it until the end of time. You can't lose, and everyone else is buying because they know they can't lose, and the stock price magically goes up.

This is now the basis of our economy. The Yahoo Tech Ticker guys explain the shell game.

If this all sounds like something out of Superman's Bizarro world, well...it is! But wait, there's more.

Since the capital BofA needs is less than the government's pledge, the bank would be left with an $11 billion "surplus" that it would seek to use to pay back its TARP loans, Alphin tells The Times.

So in sum, in all makes perfect sense: the government will use the TARP to help the bank repay its TARP loans. Peter, meet Paul. Paul, meet Peter.

But it's nothing but good news for an insolvent bank.