Bank of America reached an agreement yesterday for an additional US$20 billion in support from the US government’s emergency bailout fund, plus guarantees against losses on up to US$118 billion in troubled assets.
The agreement was announced shortly after midnight yesterday following marathon negotiations between the bank and federal officials.
It marked the latest effort by the administration of US President George W. Bush to bolster the banking system in the face of the worst financial crisis since the Great Depression.
The US$20 billion injection of fresh capital will come from the US government’s US$700 billion rescue fund and will be similar to assistance provided in November to another troubled bank, Citigroup.
Bank of America will use the money from the rescue fund to help it absorb losses at Merill Lynch.
The loan guarantees will cover about US$118 billion in loans and other holdings such as securities backed by residential and commercial real estate loans. The bulk of these holdings were obtained by Bank of America in its acquisition of Merrill Lynch, a deal which closed earlier this year.
The Treasury Department already has pledged the first half of the US$700 billion bailout fund, which Congress approved on Oct. 3, to deal with the nation’s financial crisis.
However, Bush, on behalf of president-elect Barack Obama, asked Congress to release the second half of the bailout fund earlier this week and on Thursday the Senate voted 52-42 to turn aside an attempt by opponents to block the release of the remaining US$350 billion from the bailout fund.
Before the new support package, Bank of America had received a total of US$25 billion in capital injections from the Treasury bailout fund, called the Troubled Asset Relief Program, including US$10 billion for Merrill Lynch.
In a statement, the Treasury said the new support was designed “to strengthen the financial system and protect US taxpayers and the US economy.”
“It gets down to the cost of the acquisition of Merrill and the risks associated with the deal,” said Gary Townsend, president of Maryland-based private investment group Hill-Townsend Capital.
“They were obviously in contact and in discussion with the Treasury prior to the end of year close,” he said.
Even with the government aid, Bank of America’s stock has been pummeled.
Shares of the Charlotte, North Carolina-based bank are down more than 27 percent this year — dropping to their lowest level in 18 years — and lost US$1.80, or 17.5 percent, to US$8.40 in late afternoon trading on Thursday after trading as low as US$7.35 earlier in the session. Rival Citigroup’s shares plunged US$0.87, or 19.5 percent, to US$3.66 after falling as low as US$3.36 earlier in the session.
Bank of America declined to comment on the new aid package on Thursday. Some analysts are predicting the nation’s biggest bank by assets will report a loss or lower-than-expected earnings for the fourth quarter. Its board has already halved the company’s dividend and could slash the payout again. It had been expected to report its fourth quarter results next Tuesday, but the bank moved up the release to early yesterday.
“We don’t know how they are going to be,” said Bert Ely, a banking industry consultant in Alexandria, Virginia. “The question is can they handle the recognition of the committed losses, however bad they are going to be, if they are there.”
Analysts polled by Thomson Reuters, on average, expect Bank of America to earn US$0.08 per share during the quarter and US$1.15 per share for last year.
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