WASHINGTON (Reuters) - Bank of America has been deemed to need an additional $34 billion in capital, according to the results of a government stress test, a source familiar with the results said on Tuesday.

A Bank of America spokesman declined comment.

The amount is far higher than published reports had speculated the largest bank might need. It is certain to increase the pressure on Chief Executive Kenneth Lewis, whom shareholders ousted as chairman last week.

BofA to need $34 billion in capital: source | Reuters

The title of the Reuters article really says it all.  $34  billion?  This is how the AIG situation started, first they needed a $40 billion dollar bridge loan back in September.  Back then we were first entering this financial maelstrom, people (including myself) were saying that they needed propping up or else it was financial Armageddon.  Just this one loan, that’s it and we could begin to set things straight.  Well I and most others were wrong.  We’re now at almost 200 billion for AIG and we have nothing to show for it.  And now, now it seems Bank of America is heading down that same path!

The latest were a leakage regarding those stupid stress tests.  Come on, given the parameters that were used (10.3% unemployment, etc), no one on the Street took the stress tests seriously.  If anything, when you do implement such an examination of the strength and capabilities of a financial institution, make sure that they can really survive.  They essentially used the worst we saw in the early 1980s and went with that.  Let me tell you, it isn’t enough, not when you have some places witnessing 15%+ unemployment and a collapse in housing prices north of 20%!  Before the test, we figured it was Citigroup that was the problem child of the two.  Who even knows how much Citi will need now?!?

No, ladies and gentlemen, as the old Kenny Rogers song used to go…you have to know when to hold them and you have to know when to fold them.  From AIG to Citigroup, it’s time to close up shop.  If that means nationalizing these sorry excuses, who over leveraged themselves, so be it.  The American taxpayer simply cannot afford to keep dolling out this kind of money.  Do you really believe it will stop at $34 billion? 

A lot of folks who took the other side of those derivatives trades are going to get hurt. They are going to have to realize that their payday isn’t coming.  At the rate we are going, the Federal Reserve will continue expanding its balance sheet, the Treasury will continue to print more money.  While we may argue about deflation or inflation, the long-term cost of borrowing will become more dearer.  Indeed, one need only look at futures contracts of the Eurodollar or Treasuries to see an implied increase in interest rates. 

Now some of the banks that underwent those “tests” are in reasonable shape, like Goldman Sachs.  Now Goldman has been on the other side of many of those trades, so maybe they may not get those payouts.  But they still are capable of surviving on their own and have been asking to pay back the TARP loan.  I say let them, and the others who aren’t zombie banks.  As for the rest, let the culling begin.

Like I said, some banks will simply have to cease to be, others hopefully nationalization may do the trick.  I know what you’re thinking, but what if after nationalization, these banks are still too sick?  It would have to depend on an individual case by case basis.  Some probably can be broken up and sold to healthier banks.  Others, well probably have to be folded and we will have to absorb one final cost…think of it as the cost for burial. 

We have been very generous, in my opinion.  Had we applied a more stringent market philosophy on them, they would have died months ago, but probably take us along for that one final ride.  But here we are, still on the precipice.  In the zombie horror film genre, what normally happens is that if you don’t kill off the first wave of the undead they begin to infect the general populace, thus growing the problem.  In September 2008, it was $40 billion, as of now we have already seen hundreds of billions go.  My friends, its time for a financial quarantine before the rest of the economic general populace joins the economic undead. 

cross posted from Venomopolis.com