If Six "Stress Tested" Banks Need Money, Sell-Off Will Begin (BAC)(C)

Bloomberg reports that six of the 19 banks that went through the government’s “stress test” program will need to raise more capital. That list probably includes Citigroup (C) and Bank of America (BAC).  According to Reuters, Vikram Pandit of Citi and Ken Lewis of B of A could lose their jobs when the final data comes out. Fresh blood may help bring in fresh capital.

It is time for investors in the banks on the troubled list to watch their shares hit new lows.

The first thing the federal government may do to improve bank balance sheets is swap their convertible preferred shares for common stock. At Citi, which only has a market cap of $16 billion, the dilution could push the stock from $3 to well under $2. If the bank then needs more capital, the stock will be under pressure a second time.

Bank of America may not be much better off. It has a market cap of $52 billion. One analysts said the firm will need $60 billion to $70 billion. That number is absurdly high, but it is certainly possible that B of A will need $20 or $30 billion. That, plus a conversion of government preferred could drop shares to from $8 to under $5.

None of these calculations take into account the panic factor. Investors will look at weak banks as candidates for nationalization, an issue which has moved to the back burner.

The big bank stock sell-off is about to begin.

Douglas A. McIntyre