Friday, May 01, 2009

Government says C and BAC need capital: Look to Debtholders

News leaked out overnight that the government is now pushing Citigroup (C) and Bank of America (BAC) into raising more capital.

The news is likely short-term bullish for the markets but bearish for Pandit and Lewis keeping their jobs much longer.

Tomorrow is D-Day for Ken Lewis, when he'll face down his shareholders at the BAC annual meeting. A large 'against' vote cast against his re-election could spell curtains for him. This news doesn't help him and he and his supporters will take note of the timing of the leak.

After watching the Bill Ackman and Joe Steiglitz interview with Charlie Rose from last week, I wonder why the government doesn't look to these banks' debtholders as sources for the needed capital -- namely in converting their debt to equity. The taxpayers aren't going to sign another blank check and private capital doesn't want to be a hero. Forcing these debtholders into equity will get these banks to quickly get out from paying endless interest and force them to grow their capital by making loans.

Position: None.

Originally published in RealMoney.com on 4/28/2009 7:42 AM EDT

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