Friday January 16, 09:45 PM
Bank of America gets 20 bln dlr injection, new guarantees
By Rob Lever
WASHINGTON (AFP) - The US government extended a new lifeline Friday to Bank of America (NYSE: IKJ - news) , injecting another 20 billion dollars in capital and guaranteeing shaky assets to help it weather the grinding financial crisis.
The bailout for the largest US bank by assets is aimed at helping Bank of America absorb broker Merrill Lynch (NYSE: MER - news) , which faced a meltdown last year as the credit crunch intensified.
A joint statement by the US Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said the government would invest 20 billion dollars in the bank, on top of a 25-billion-dollar injection last year under the Troubled Asset Relief Program (TARP).
Additionally, the government "will provide protection against the possibility of unusually large losses" on 118 billion dollars of assets backed by residential and commercial real estate loans, the market for which has been frozen due to the housing meltdown and credit crisis.
The banking giant will pay the government a dividend of eight percent on the investment and agree to limits on executive compensation. The bank (NASDAQ: TBHS - news) also agreed to implement a "mortgage loan modification program" to limit foreclosures that threaten to undermine a recovery in the housing sector.
The announcement came hours before BofA released its fourth-quarter earnings. The Charlotte, North Carolina-based bank posted a loss of 1.7 billion dollars, after managing a profit of 268 million dollars a year earlier.
The results stem from soaring credit costs and massive write-downs. Merrill Lynch, which was not included in the results, lost over 15 billion dollars in the quarter.
The bailout comes with US authorities scrambling to avert a further collapse in the banking sector that could deal another blow to an ailing economy. A similar deal was announced last year with Citigroup (NYSE: C - news) .
"The objective of this program is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security," the Treasury said.
But some analysts were skeptical and Bank of America shares fell 13.7 percent to 7.18 dollars after a dive of 18 percent on Thursday.
"These measures have seemingly removed a worst-case scenario for equity holders, but they show just what a mess Bank of America has managed itself into," said Patrick O'Hare at Briefing.com.
Even as other banks reeled, Bank of America appeared healthy enough to buy up troubled mortgage lender Countrywide Financial (NYSE: CFC - news) last year as well as Merrill Lynch.
But Robert Brusca at FAO Economics said the bank "simply bit off more than it could chew."
Peter Cohan of Peter Cohan & Associates consulting firm said Bank of America rushed to buy Merrill without a full understanding of its troubles.
"The numbers clearly show that without Merrill, Bank of America would be in relatively good shape, but with it, Bank of America is a financial basket case," Cohan said.
Standard & Poor's said it could downgrade the bank's credit rating and warned that BofA faces the possibility of "further write-downs" from Countrywide (LSE: CWD.L - news) and Merrill Lynch.
BofA has already received 25 billion dollars in capital injections from the TARP, a US financial bailout fund set up to help rescue mainly banks reeling from financial turmoil triggered by a home mortgage meltdown. That included 10 billion dollars for Merrill Lynch.
Under the latest agreement, BofA will absorb the first 10 billion dollars of losses and the US taxpayers will cover the next 10 billion. Any additional losses will be shared 90 percent by the US government and 10 percent by BofA.
The government aid comes as the banking sector remained in deep trouble from the real estate meltdown and subsequent credit crunch that has led to around one trillion dollars in worldwide losses.
Citigroup announced Friday a quarterly loss of 8.29 billion dollars and said it was splitting into two businesses in an effort to restore profitability.
Bank of America on September 15 announced it was buying Merrill Lynch for 50 billion dollars in stock, scooping up the Wall Street icon battered by the housing and credit crisis.
While giving a lifeline to a troubled Wall Street giant, the deal created the world's largest financial services company.
The announcement came at the close of a tumultuous weekend that saw Wall Street rival Lehman Brothers (NYSE: LEH - news) seek bankruptcy protection, leading to an intensification of the crisis in the global financial system.
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