In a recent bullish report on Bank of Boston, PaineWebber Inc. analyst Lawrence W. Cohn took aim at the Federal Reserve Board for equivocating before permitting the company to purchase two smaller New England companies. Below are excerpts from the report.

The Federal Reserve Board has approved Bank of Boston's applications to acquire Society for Savings and Multibank Financial, subject to the company's raising an additional $70 million in preferred stock and $100 million in subordinated debt.

We view the approval of these applications as a clear positive for Bank of Boston. We believe that the New England region will experience significant consolidation over the next several years. Bank of Boston is one of only a handful of institutions that is well situated to benefit from this process.

In our view, Bank of Boston has a once-in-a-life-time opportunity to acquire a substantial increase in its market share through acquisitions.

These acquisitions, if properly implemented, can lead to much higher levels of profitability through reductions in the consolidated company's expense base.

Bureaucratic Bungling

In our opinion the Federal Reserve Board and its staff have been shamefully incompetent in handling the Bank of Boston application.

There is no excuse in allowing an application to go to the board if there are significant doubts about the capital adequacy of the acquiring institution. In Bank of Boston's case it comfortably exceeds the Fed's guidelines for "well capitalized" banks.

Nonetheless at the first of three board meetings to discuss the application, a majority of the board voted to turn down the application on the apparent basis that the holding company was not an adequate source of strength for its banking subsidiaries.

Doesn't the board and its staff have an obligation to the banking industry to make the rules clear? By any objective measure Bank of Boston is more than adequately capitalized.

Accuracy Unlikely

We find it incredible that the board can so fine-tune any bank's capital requirements that a swing of less than 3% in a bank's Tier I capital can make the difference between approval and disapproval of an acquisition application.

[The preferred-stock issuance is expected to increase Bank of Boston's Tier 1 capital by about 2.6%.]

How is it possible that the Fed staff can be so out of touch with the board that it not know that an applicant will need additional capital and communicate that need to the applicant?

Alternatively, and more likely, what we see in the board's ruminations is an institution that is so out of touch with the industry it regulates that it feels no necessity to establish clear guidelines for the industry.

Initial Nay Vote

The board met three times to discuss the Bank of Boston application. At the first meeting the board voted to turn the application down.

After the first meeting, but before the board had an opportunity to issue a ruling turning the application down, Bank of Boston offered to increase its capital by $100 million of sub debt and $70 million of preferred stock.

This additional capital was enough to sway a majority of the board to approve the applications. Three of the board members refused to vote in favor of the revised applications on the basis that even through the new application was acceptable, Bank of Boston had in some fashion violated their view of the application process.

These governors wanted to deny the application and force Bank of Boston to reapply even though they had already made up their minds that they would approve the new application.

In our view this is an example of the ultimate bureaucratic mentality. They are so caught up in the niceties of the process that the realities of the substance eludes them.

We don't know why these applications were turned down originally. Nor do we know why it took the board three tries to reach a decision. But it strains our sense of credulity to believe that Bank of Boston's offer of an insignificant amount of incremental capital was the real issue.

The capricious nature of banks' regulatory environment, as reflected in the Bank of Boston applications, has got to be one of the larger causes of the industry's higher-than-necessary cost of capital.

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