By Scott Lanman and Craig Torres
Jan. 16 (Bloomberg) -- The U.S. government agreed to invest $20 billion more in Bank of America Corp. and guarantee $118 billion of its assets to help the lender absorb Merrill Lynch & Co. and prevent the financial crisis from deepening.
The government agreed to the rescue “as part of its commitment to support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington.
Today’s emergency action shows officials so far have failed to quell concerns about the viability of some of the biggest banks even after deploying $350 billion of a financial-rescue fund and a doubling of the Fed’s balance sheet. The announcement came after a day in which Bank of America and Citigroup Inc. shares both tumbled amid concern of rising credit losses.
“This is more short-term fire-fighting tactics,” said Ed Rogers, chief executive officer at Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K. “Once again, the U.S. government does not seem to be thinking in terms of final solutions to the problem.”
The U.S. already had injected $15 billion into Bank of America, the country’s biggest lender, and another $10 billion to Merrill to bolster the combined company against the global credit crunch.
Citigroup Model
The plan mirrors the government’s emergency actions with Citigroup in November, which explicitly insured the bank against losses on toxic assets with taxpayers footing the bill. The U.S. backed up a $306 billion portfolio of Citigroup real-estate loans and securities, sharing losses beyond $29 billion on what were likely to be some of the bank’s worst holdings.
With today’s Bank of America deal, the government will protect a $118 billion pool of assets that a U.S. official said includes residential and commercial real-estate holdings and credit-default swaps. The official spoke to reporters on a conference call on condition of anonymity.
The $20 billion purchase of preferred shares, which carry an 8 percent dividend, will be made today. The funds come from the first half of the Treasury’s Troubled Asset Relief Program. Yesterday, the U.S. Senate voted to allow the release of the next $350 billion of the program.
Two-Week Negotiation
Talks between the government and Bank of America have been held for the past couple of weeks, an official said. The Charlotte, North Carolina-based bank told regulators in December it might abandon the takeover because of Merrill’s worse-than- expected results, three people familiar with the matter said before the announcement.
The government insisted the Merrill deal proceed because its collapse would renew turmoil in the financial system, according to the people, who declined to be identified because talks were private.
Bank of America will absorb the first $10 billion of losses in the pool of assets, of which the “large majority” were assumed with the Merrill purchase, the statement said. The company will absorb 10 percent of any additional losses, with the government on the hook for the remainder.
The Fed will backstop assets with a loan, after the government’s first $10 billion in losses, shared by the Treasury and the FDIC.
Future Losses
The asset pool includes cash assets with a current book value of as much as $37 billion and derivatives with maximum potential future losses of as much as $81 billion, according to the term sheet provided by the government.
Separately, the FDIC said today it plans to propose changing its bond-guarantee program for banks to cover debt as long as 10 years, from the current three-year maturity. The FDIC will soon propose rule changes to the Temporary Liquidity Guarantee Program, today’s statement said.
“The U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks,” the joint statement said.
Shares of Bank of America plunged 18 percent yesterday, sliding to $1.88 to $8.32 in New York Stock Exchange composite trading after hitting $7.35, its lowest level since February 1991. The bank moved up its fourth-quarter report to today at 7 a.m. New York time.
Earnings Announcement
“The motivation is to try and basically get information to the market sooner rather than later because of all the anxiety that’s out there,” said Bert Ely, chief executive officer of Ely & Co., a bank consulting firm in Alexandria, Virginia. It’s a “very tense situation now,” he said.
Federal Reserve Chairman Ben S. Bernanke earlier this week said troubled assets remain a “continuing barrier to private investment” in financial institutions and recommended that they be extracted with government help. He urged a “comprehensive plan,” with one possibility being to erect a so-called bad bank to purchase and administer the troubled loans and securities.
Bank of America’s Chief Executive Officer Kenneth D. Lewis has spent $129 billion on acquisitions, including regional lenders FleetBoston Financial Corp. and LaSalle Bank, credit-card issuer MBNA and investment manager U.S. Trust Co.
Lewis overreached by rescuing two money-losing companies in six months, including New York-based Merrill Lynch and Calabasas, California-based Countrywide, said analysts including Paul Miller of Friedman Billings Ramsey Group Inc.
“This thing is unraveling so fast that he may know his job is lost,” Miller said.
Bank of America spokesman Robert Stickler said, “We don’t comment on uninformed gossip.”
Merrill Deal
Bank of America on Sept. 15 agreed to buy Merrill Lynch, the world’s largest securities firm, after a weekend of negotiations between Lewis and Merrill CEO John Thain. The $19.4 billion transaction came as Lehman Brothers Holdings Inc. sank into bankruptcy, crippled by the frozen credit markets.
“Bank of America has all kinds of problems with its acquisitions,” said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “They’ve been so acquisitive, they find themselves with very little in tangible equity.”
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
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