Bank of America needs 34 billion USD to pass Fed's stress test

America's largest bank, Bank of America, is reported to require additional 33.9 billion USD to meet the capital target set by Federal Reserve during the stress test. The stress test also known as Supervisory Capital Assessment Program (SCAP) was conducted by Fed on 19 biggest financial institutions to find out the capital that will be required if the recession becomes deeper. The results of the test are expected to start coming from this week onwards. Speculation is rife that most of the banks will need additional capital to pass the test.

BofA had about 240 billion dollars of shareholder's equity capital as on 31st March 2009. This was about 10.3% of its total assets (2.3 trillion dollars). Since 2007 BofA has increased its shareholder's capital significantly to deal with the financial crisis and economic recession. However, if the macro-economic situation worsens in near term BofA would require still more capital as the results of SCAP of Fed would show.

According to a ews article by UK's 'The Guardian', BofA could sell a part of its stake in Chinese bank 'China Construction Bank' (CCB). The stake sale could fetch BofA about 8 billion USD. Even with this sale, BofA will have to garner the remaining 26 billion USD from other sources. In case of no other option left, it may have to convert some of the government's prefferred shares to common shares, thereby diluting the existing shareholder's stake.

Impending recession and the aftermath

The bearish movement in Indian stock market in last couple of weeks draws everyone’s attention towards the world economy again. In the era of globalization, any significant move in the economy of big players is going to have well spread impact (Article on Decoupling theory). And if the movement is there in US economy no country will be left untouched...

The movement in the US economy started in the month of September with the Subprime crisis followed by credit crunch in the US market. All the major banks in US reported huge losses and Federal Reserve had to cut the interest rate first time after 2003 by 50 basis points (0.50%). The complete effect of subprime crisis was yet to be realized and that was evident with further writing off bad debt by major bank in 3^rd quarter of 2007. The economy started slowing down, and financial market came under much stress. Fed had to intervene again within 4 months of earlier cut and the interest rate was dropped by 75 basis points to 3.5%. This was again followed by reduction in benchmark short-term interest rate by 50 basis points to 3% within 9 days of previous cut. This was the most aggressive movement in interest rates since 2001, and is expected to keep the housing slump and the credit crunch brought on by a meltdown in the home-lending market from pushing the broader economy into the red.

But even after all these measures, the consumer spending in the U.S. increased at the slowest pace in last six months. The unemployment insurance jumped, U. S. economic growth slowed to 0.6% annual rate in the 4^th quarter from 4.9% in the prior three quarters. All these facts indicate towards an impending slowdown and countries need to hedge the movement to all possible extent.

Countries like India has got major exports in U.S. and reduced consumption rate will certainly impact the export business heavily. While, the export industries are already suffering with appreciation in Rupees and it will get worsen with any slowdown in demand abroad; the crude oil price had come down after the speculation on reduced demand by the world’s biggest energy consuming country U.S. This will relax the Indian oil companies a bit with reduced subsidy (more about Crude oil price and its impact).

The significant cut in interest rate by Federal Reserve is aimed to avoid any credit crunch and after the RBI (Reserve Bank of India) decision not to cut the interest rate, heavy credit inflow is expected in coming month. The volatility in stock market reflects the suspicious and bearish environment. The GDP in the year 2007 grew by 9.6% and growth is expected to be close to 9% in FY2008. The government needs to be well prepared for any uncertainty and be ready with flexible policy to avoid any major impact.

Goldman Sachs & Merrill Lynch comment on recession of US economy

According to a report from Merrill Lynch, US economy is already in recession. It refers to the employment report as an confirmation of recession. The unemployment rate of 5% in December was supportive of this view. The housing market is already falling and consumer spending is also lower.

While Goldman Sachs declined the recession in the US economy, it predicted that recession is very close and US economy may see it in 2008.

Goldman Sachs beleives that the slowdown in the US economy will affect the interest rates, since Fed bank may choose the option of lowering rates from 4.25% to about 2.5%

Goldman Sachs cautioned the investors to stay away from banking and finacial sector and increase their holdings of healthcare and consumer-related stocks.