Bank of America Gets $138 Billion Lifeline for Merrill Losses

By Scott Lanman and Craig Torres

Jan. 16 (Bloomberg) -- Bank of America Corp., the largest U.S. bank by assets, received a $138 billion emergency lifeline from the government to support its acquisition of Merrill Lynch & Co. and prevent the global financial crisis from deepening.

The U.S. government agreed to invest $20 billion more in Bank of America and guarantee $118 billion of assets “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.
The bailout may increase pressure on Chief Executive Officer Kenneth D. Lewis, who reports fourth-quarter results today, to defend his decision to buy the ailing Merrill. Lewis overreached by rescuing two money-losing firms in six months, including New York-based Merrill and Calabasas, California-based Countrywide Financial Corp., 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 the firm doesn’t comment on “uninformed gossip.”
Shares of Bank of America plunged 18 percent yesterday, sliding $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.

‘Fire-Fighting Tactics’ 

“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.
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. Citigroup Inc.’s shares also 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.”

Citigroup Model 

The U.S. had already 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 credit crunch.
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.

Acquisition Spree 

Lewis, 61, 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.
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.”

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.

Future Losses 

The government insisted the Merrill deal proceed because its collapse would renew turmoil in financial system, according to the people, who declined to be identified as 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.

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.
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.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Last Updated: January 16, 2009 02:39 EST