BofA’s TARP Payback Reminds Market of Banks’ Capital-Raising Needs

Wednesday’s market action wasn’t in stocks, at least during the regular trading day, which was dominated the unrelenting rise in gold. But after the official 4 PM EST close, Bank of America (BAC) said it will repay some $45 billion of funds under the Treasury’s Troubled Asset Relief Fund.

The good news from BofA’s standpoint is that repayment of TARP funds will get it out from under the thumb of the government’s pay czar, making it better able to attract high-priced investment banking talent for its Merrill Lynch unit.

BofA’s experience points up the dilemma confronting any entity that has taken TARP funds: to get rid of Uncle Sam as a partner means raising equity capital. which invariably dilutes shareholders.

The bad news for BofA shareholders is that replacement of TARP money means the bank will have to raise some $20 billion of fresh capital. BAC shares, which were down 24 cents, or 1.5%, to 15.65 during regular trading while the overall market was flat, shed another 23 cents, also 1.5% after rounding, to 15.42 in after-hours trading. (Later, however, BofA shares rebounded to around 16.)

Banks’ need for capital will only increase as loan losses continue to rise. Moody’s Investors Service said Wednesday those losses will total over a half trillion dollars in the three years to 2010. That means banks will have to top off capital to offset the balance-sheet effect of those losses.

While the equity markets contemplate the billions they’ll be called on to raise, their near-term concerns remain Friday’s jobs numbers. The ADP report of slightly larger-than-expected private job losses of 169,000 had little impact while traders awaited the government’s numbers.

Thursday, look for Federal Reserve Chairman Ben Bernanke to face some rough grilling from his congressional inquisitors in his renomination hearings. The low regard with which central banks are held was demonstrated by gold setting another record Wednesday, with the active February Comex contract settling $12.80 an ounce higher at a record $1,213.