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Big Payoffs & Lessons From Bank Of America's Big Rewards

Bank of America branch, New York City.
Oliver Quillia for cnbc.com
Bank of America branch, New York City.

With its shares up almost 20% from where it priced its massive offering of stocklate yesterday, hedge funds that got sizeable allocations of Bank of Americashares are crowing, while many accounts that got cut back severely on their requests are cursing.

All of that is fine with B of A , which orchestrated its giant stock sale flawlessly, creating enormous demand in the aftermarket.

B of A rewarded a bunch of hedge funds and other institutional investors who had approached it in recent days about the possibility of buying stock from the company. It was these “reverse inquiries” that gave B of A confidence it could successfully find a home for 825 million shares, capping a so-called “At the Market” stock sale it began on May 7th which had seen the company already sell 400 million shares.

When it came to last night’s sale of $8.25 billion worth of shares, B of A gave full allocations to those funds that had made reverse inquiries (many of them had asked for millions of shares), while it cut everyone else back to as little as 10% of their request and didn’t honor any requests below one million shares.

Many accounts that were short B of A and hoped to cover with the stock sold in the offering were unable to do so. This was almost entirely an institutional deal. B of A only gave 20 million shares to the entire retail channel at its Merrill Lynch brokerage unit.

That chariness, while it may have angered some accounts, is a key reason the stock has performed so strongly today.

It has also led some funds to start making reverse inquiries of banks such as Suntrust and PNC, which like B of A, are selling stock every day, rather than in a big offering.

The hope of these funds is that they can persuade those banks to do as B of A did - using one big trade to finish its capital raising and giving any stock they do buy a nice pop in the after market.

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