This sounds like the perfect setup for the government’s ultimate plan.

A surge in troubled loans overshadowed better-than-expected earnings at Bank of America Corp, and the largest U.S. bank expects the credit situation to worsen, driving its shares down 17 percent.

While first-quarter profit more than doubled, the results are unlikely to end calls by investors for Kenneth Lewis to step down as chief executive or give up the post of chairman. The bank’s purchase of Merrill Lynch & Co on January 1 led to an emergency federal bailout two weeks later.

And that plan is…

Obama administration officials have determined they can avoid asking Congress for more bank bailout funds by converting existing loans to the largest U.S. banks into common stock, The New York Times reported on Sunday.

President Barack Obama’s top economic advisers now say such a conversion would let them stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, the paper said, citing administration officials it did not identify.

Converting the loans to the 19 biggest U.S. banks into common shares would turn the government aid into available capital and give the government a large equity stake in return, the newspaper said.

First it was baby steps, but now it seems were in a full out sprint toward nationalization.

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