Bank of America Corp. said Thursday it will raise more money than the government said it needed in order to withstand a deepening recession.
Upon the completion of a debt exchange later this week, the Charlotte, N.C.-based bank will have raised $38 billion. That is $4.1 billion more than the $33.9 billion the Federal Reserve said last month the bank needed to protect against potential losses should the economy worsen.
The move was largely expected within the investment community.
What was not expected, if anything, was the speed with which Bank of America raised the money, said Tony Plath, finance professor at the University of North Carolina at Charlotte.
"Remember, they were essentially given 30 days to submit a plan. Heck, they raised the capital in 30 days," Plath said. "That's proof that they have credibility in the capital market and that they did have residual assets that they could in turn dispose of in order to raise capital."
In its latest move to boost capital, Bank of America said it has preliminarily agreed to exchange $3.9 billion in depository shares for common stock as part of a debt exchange offer. Settlement of the exchange, which was oversubscribed, is expected to be completed Friday.
The bank has also agreed to convert about $10.7 billion in preferred stock into 789 million shares of common stock.
As of June 2, the bank said it had raised almost $33 billion through stock offerings, asset and investment sales and the conversion of preferred shares to common stock.
Among those deals, the bank raised $13.5 billion in capital from the direct sale of common stock, $1.3 billion from reduced dividends on preferred shares, and it sold a portion of its stake in China Construction Bank.
Preferred shares are essentially a loan that must be repaid along with interest. Common stock is an actual ownership stake in the company. By increasing the number of outstanding common shares, Bank of America effectively creates a broader capital base to absorb any potential losses. It also reduces interest or dividend payments that must be made on the depository and preferred shares.
Bank of America said none of the preferred shares that were converted to common stock were shares held by the government as part of the Troubled Asset Relief Program launched last fall by the U.S. Treasury Department. That program provided loans to hundreds of banks amid the mushrooming credit crisis as part of an effort to alleviate stagnant markets. In return, the government received preferred shares. Bank of America received $45 billion as part of the program.
Bank of America has said it hopes to repay those loans as soon as it can.
Last month, the government completed "stress tests" on 19 of the nation's largest financial firms to determine how they would fare amid a deepening recession. The government determined Bank of America had the largest capital shortfall.
Nearly all banks have faced rising loan losses as more customers fall behind on payments. Investment losses have also piled up at some banks as the value of bonds and other debt have declined.
Shares of Bank of America fell 16 cents, or 1.3 percent, to $12.19 in late morning trading.
AP Business Writer Stephen Bernard reported from New York.