To Exchange Or Not To Exchange, That Is The Question (BAC)

Today, the well-telegraphed move by Citi (NYSE: C) to convert the government's preferred shares into common shares, to boost tangible common equity, was announced. After the move, the U.S. government would own approximately 36% of Citi's outstanding common stock and existing shareholders would own approximately 26% of the outstanding shares. Citi shareholder greeted the news with a 32% smack-down of the stock due to the dilution.

After the share exchange, Citi's tangible common equity will rise to as much as $81 billion, or over 4% (including a deferred tax asset), the new "gold standard" in the group.

Now that Citi has made the move, attention is turning to the other banks and if they will be following with their own exchange of the government's preferred shares into common.

Bank of America (NYSE: BAC) is commonly thought to be the next in line to have a preferred for common exchange offer. Bank of America's common shares are down 13.7% today on the dilution fears from such a move.

Despite the speculation, BofA's CEO Kenneth Lewis has insisted the company doesn't need further assistance. But despite Lewis' repeated defense of the stock, an analyst at Egan-Jones said today that BofA will need $100 billion in equity within the next 100 days. How will they get there without an exchange?

Other large U.S. banks that have U.S. investments in the form of preferred shares, that could be looking at a conversion option include: JP Morgan (NYSE: JPM), Wells Fargo (NYSE: WFC), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Bank of New York Mellon (NYSE: BK), State Street (NYSE: STT), and US Bancorp (NYSE: USB).

JPMorgan Chase (NYSE: JPM) has been making moves to boost its common equity without government assistance, including a recent move to slash the dividend 87%. JPMorgan CEO Jamie Dimon indicated the company will "repay TARP as soon as is prudent." Goldman Sachs and Morgan Stanley have also made comments that they would look to payback TARP.

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