Bank of America getting extra $20B in bailout funds
WASHINGTON -- The U.S. government early Friday morning agreed to invest $20 billion in Bank of America, and to protect the bank against up to $118 billion in potential losses from bank assets related to risky mortgage loans.
Early Friday morning, Bank of America reported a $2.39 billion fourth-quarter loss and slashed its quarterly dividend to a penny. Meanwhile, Merrill Lynch posted a $15.31 billion loss for the period. The company reported a profit of $4 billion for the year.
"Last quarter we said that market turbulence, economic uncertainty, and rising unemployment would take its toll on quarterly earnings, and that has certainly been the result for the fourth quarter," Chief Executive Ken Lewis said during a conference call with investors Friday.
"Congress has passed a financial stabilization plan as well as other programs put in place, starting to stabilize the market and promote liquidity, but at a pace slower than any of us would like," he added.
Quarterly revenue after interest expense rose 19% to $15.98 billion from $13.45 billion a year earlier. Net interest income, or the money banks make on loans minus what it pays out in interest on personal bank accounts, rose 37% to $13.41 billion from $9.82 billion. The increase was fueled by higher market-based income, the favorable rate environment, loan growth and the acquisition of mortgage lender Countrywide Financial.
But noninterest income, or the cash banks make from mortgage loan servicing fees and other fees and charges, declined 29% to $2.57 billion. Sales and trading losses in BofA's capital markets and advisory services segments more than offset higher mortgage banking income, and gains on sales of debt securities.
The Charlotte-based bank has been under pressure from mounting losses at brokerage firm Merrill Lynch, which it agreed to acquire on Sept. 15. Bank of America BAC announced Jan. 1 that it had completed its acquisition of Merrill Lynch and by then had government assurances for help.
Government officials feared BofA's fragility could ripple through the already weak economy if action weren't taken. Bank of America's shares fell 18% to $8.32 Thursday and are down 42% since Jan. 1.
In exchange for the cash infusion, BofA will issue preferred shares to the U.S. Treasury with an 8% annual dividend. The government will provide a 10-year guarantee on the bank's securities that are backed by residential loans and a five-year guarantee on those backed by non-residential loans. BofA's quarterly dividend will be slashed to 1 cent from 32 cents, and a new executive compensation plan will be drawn up.
The move brings the government's investment in BofA to $45 billion. In October, BofA received $15 billion, and Merrill Lynch received $10 billion, from the Troubled Asset Relief Program, which was set up to steady the shaky financial markets.
"The government is caught, because to let them fail now means the first round of cash would be flushed down the toilet," says Peter Schiff, president of Euro Pacific Capital.
BofA is responsible for the first $10 billion in losses; the government will bear 90% of any additional losses.
The structure is similar to the deal the government struck in November with Citigroup. Citi received $20 billion on top of its first bailout of $25 billion, and also issued the government rights to buy 188.5 million shares. The government also agreed to shoulder losses on $306 billion of the bank's riskiest loans, after Citi covered the first $29 billion in losses.
However, questions remain about Citi's ability to handle soaring credit losses. Earlier this week, it sold a majority stake in its profitable brokerage division Smith Barney to Morgan Stanley. Citi's stock fell 15.45% to $3.83 on Thursday.
The government had been in negotiations with the bank for weeks as the severity of the problems at Merrill became clearer, said government officials, who spoke on condition of anonymity. They were not named because they were not authorized to speak about the deal publicly. Members of president-elect Barack Obama's administration were notified of the negotiations, the officials said.
The funds for the $20 billion loan will come from the first half of the $700 billion Troubled Asset Relief Program passed by Congress last year to bolster the financial sector. The Senate voted to release the second half of the TARP money to the Obama administration Thursday. BofA should receive the $20 billion Friday, the government officials said.