Bank of America Corp (BAC.N) shares fell nearly 8 percent on Monday, reaching their lowest level since March 2009, as investors fretted the bank may need to raise some $50 billion of capital and worried about potential additional mortgage lawsuit payouts.

The cost of insuring the company's debt against default also jumped.

In a note to clients, a Jefferies strategist outlined how much capital Bank of America would need to raise to meet new requirements.

The strategist did not determine exactly how likely a capital raise was, but said the market seems to be bracing for a stock raise and looked at how different issuance prices would affect earnings per share. The worst case scenario Jefferies considered was a $52.4 billion capital raise. Bank of America's market value was about $65 billion on Monday.

Bank of America is widely seen as needing to boost capital to meet upcoming requirements under the new Basel III rules. The bank has said repeatedly it can meet its new requirements through earning more money, but many investors believe generating enough earnings could be difficult.

The odds are higher that they'll have to do a new capital raise, and a dividend increase is out of the realm of possibility in the near term, said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.

In a conference call, Chief Executive Brian Moynihan said the bank issued so many new shares during the financial crisis that it does not view selling common equity as an option. [ID:nN1E779188]

The bank may benefit from the fact regulators could phase in new rules over years, giving banks time to boost capital levels, CreditSights analysts wrote in a note on Monday.

But one possible source of capital may not give as much of a benefit as investors hoped, the CreditSights analysts said.

If Bank of America sold its stake in China Construction Bank (0939.HK), it would only boost its Basel III tier 1 common ratio by 0.1 percentage point, because of the way the bank accounts for the stake, they said. As of the second quarter, that ratio stood at 6.6 percent. Systemically important banks may need capital levels of more than 9 percent.

CCB said on Monday its relationship with Bank of America remains strong and it is in talks with the U.S. bank to extend its cooperation for another five years. [ID:nL4E7JM1HL]

Bank of America's shares, which fell 55 cents to $6.42, were the worst performers in the Standard & Poor's 500 .SPX on Monday. Since the beginning of August, the bank's shares have lost some 35 percent of their value, erasing about $35 billion of market value.

The cost of protecting its debt against default jumped 49 basis points to 380 basis points, or $380,000 a year for five years, for every $10 million of debt protected in the credit derivatives market, according to financial data provider Markit.

LEGAL WOES

Slowing economic growth could weigh on Bank of America's earnings, making it harder for the bank to boost its capital levels, analysts have said.

Legal liabilities linked to mortgages could also pressure the bank. The bank agreed to an $8.5 billion settlement with a group of mortgage bond investors in June. That agreement is subject to court approval and multiple parties have objected to it.

The bank has agreed to other settlements over mortgages and is in the midst of negotiating one now with federal and state officials. A report in the Wall Street Journal on Monday said government officials are clashing with banks over how wide-ranging their legal settlements over mortgages should be.

Banks, including Bank of America and JPMorgan Chase & Co (JPM.N), are looking to be released from a wide array of potential litigation linked to mortgages in exchange for paying penalties of $20 billion to $25 billion, the newspaper reported. Government officials are looking for narrower releases.

Investors had hoped banks could negotiate this settlement and be much closer to ending their legal problems from mortgages, but that may have been too optimistic, investors said.

They could still have people coming after them, even after this settlement, said one analyst at a hedge fund.

Much of Bank of America's mortgage problems come from its $2.5 billion acquisition of Countrywide in mid 2008.

Countrywide was at one point the largest U.S. mortgage lender.

JPMorgan shares fell 2.7 percent to close at $33.41, their lowest since July 2009. Overall, bank stocks as measured by the KBW Bank Index .BKX fell 1.1 percent to their lowest since July 2009.

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