The U.S. government agreed Friday to provide Bank of America with US$20 billion in capital and to provide a package of guarantees on an US$118 billion asset pool.
As part of the deal, the U.S. Treasury and the Federal Deposit Insurance Corp. (FDIC) will provide protection against the possibility of unusually large losses on an asset pool of approximately US$118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value.
The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch last fall. The assets will remain on Bank of America’s balance sheet. And, as a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC. In addition, it said that the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
Also, the Treasury will invest US$20 billion in Bank of America from the Troubled Assets Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Bank of America will comply with enhanced executive compensation restrictions and implement a mortgage loan modification program, it said.
The deal was announced as Bank of America reported that its profit for 2008 dropped to US$4.0 billion from almost US$15 billion the prior year. In the fourth quarter, the company had a net loss of US$1.79 billion compared with net income of US$268 million a year earlier. These results include Countrywide Financial, which Bank of America purchased on July 1, but not Merrill Lynch & Co., Inc., which was acquired on January 1, 2009.
Merrill Lynch preliminary results indicate that it suffered a fourth-quarter net loss of US$15.3 billion, it noted.
The bank said that its weak fourth quarter results “were driven by escalating credit costs, including additions to reserves, and significant writedowns and trading losses in the capital markets businesses. These actions reflect the deepening economic recession and extremely challenging financial environment, both of which significantly intensified in the last three months of 2008.”
Separately, the FDIC board announced that it will soon propose rule changes to its Temporary Liquidity Guarantee Program to extend the maturity of the guarantee from three to up to 10 years where the debt is supported by collateral and the issuance supports new consumer lending.
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