Bank of America announced a plan to reduce its debt by issuing nearly $3 billion in common stock.  The new stock then would be issued in exchange for preferred shares currently held by investors.  The plan was outlined in a filing on Thursday with the SEC. With the move, BofA would be reversing its stated intention not to sell new shares.   CEO Brian Moynihan has for months been maintaining that additional share sales are not necessary to raise capital.  Yet, times are different these days, and BofA shares recently have been battered amid fears about the effect of the Euro debt crisis and other concerns about financial sector companies. The exchange, which could involve up to 400 million common shares, could allow the bank to raise $2.76 billion, based on Thursday’s closing price of $6.91.  Yet, bank officials noted that the move was not only driven by a need to increase the bank's capital cushion, but also by the opportunity to reduce debt and interest expenses. While BofA's decision isn't final, it's nearly certain that bank will go forward with the exchange in the very near future.  By saving money on interest payments on the preferred shares, the move to issue new common shares would not reduce earnings and could actually add to earnings in the short term, the bank said in its filing. Additionally, swapping shares of common stock for the preferred shares will add to the bank’s Tier 1 capital base, because under international regulatory standards preferred stock does not count as common equity while common stock does. And, because BofA's preferred stock is trading below par value, the bank can buy it back from investors at a price above where it is trading, yielding a gain for those shareholders - but at a price that's still below par.  That would allow Bank of America to book a gain on the difference. Downside of the Swap. By further increasing the number of shares outstanding from the current level of just over 10 billion, BofA is unlikely to win favor with investors.  Upon learning of the move, BofA shares fell nearly 2% in after-hours trading. Interestingly, this is the 2nd time this week that BofA has reversed course.  On Tuesday, the bank announced plans to cancel its planned $5 fee on debit cardholders - responding to the overwhelming uproar from consumers, as well as politicians in Washington.  Then again, all BofA's rival banks have abandoned the debit card fee. Impact on Warren Buffet and Other Shareholders. Mr. Buffett, who invested $5 billion in the company in August by buying preferred shares, would not be affected by the bank’s latest plan.  However, common shareholders will see their stakes diluted by about 4% with the swap.  Their holdings also were diluted by Mr. Buffett's purchase - although, at the time, the transaction gave BofA shares a tremendous boost in the markets. Nevertheless, with a possible combined 9% dilutive effect, many shareholders will feel they are being "nickeled and dimed" by the bank.     [NYTimes, 11/3/11]