Bank of America Corp will receive $20 billion in fresh government investments and a federal backstop against $118 billion of bad assets it holds to help it absorb Merrill Lynch & Co, U.S. officials said on Friday.
As part of an emergency plan announced by the Treasury Department, the Federal Reserve and Federal Deposit Insurance Corp, Treasury will provide Bank of America, the largest U.S. bank by assets, with $20 billion in fresh capital from a government bailout fund in exchange for preferred stock.
The government also agreed to share in losses on the troubled assets, which Bank of America took on when it paid an estimated $19.4 billion for Merrill on Jan. 1.
With the financial system foundering under a mountain of bad mortgage-related debt, officials feared a deteriorating capital base at Bank of America, which has already received $25 billion from the government, posed a risk to the financial system as a whole.
The government backstop will cover only domestic assets originated before mid-March 2008 and will cover residential and commercial mortgage investments, derivatives and corporate debt.
Under the agreement, residential assets will enjoy a 10-year guarantee — twice as long as non-residential assets.
Bank of America must absorb the first $10 billion of potential losses on the assets, with the government absorbing the next $10 billion and with further losses split 90/10, with the bank taking the smaller share.
TOXINS LINGER
Bank of America had closed the Merrill transaction without government help, but market conditions have substantially worsened since Sept. 15, when the deal was struck after less than 48 hours of hurried talks on the day Lehman Brothers Holdings Inc went bankrupt.
Lehman's failure touched off the worst phase of a credit crisis which has now raged for about 18 months and has led to a series of U.S. bailouts of financial firms.
Briefing reporters on a conference call, a senior U.S. official said each emergency action was hoped to be the last. Reporters were told the $20 billion in capital the government would provide Bank of America would come from the first $350 billion of a $700 billion bailout fund, diverting money that had been pledged for other uses.
Earlier on Thursday, the U.S. Senate defeated a resolution that would have blocked President-elect Barack Obama, who takes office on Tuesday, from accessing the final $350 billion of bailout money.
A government official said the incoming administration was informed of the negotiations with Bank of America and notified of the transaction.
In addition to the $20 billion in preferred shares the government will receive for its investment, Bank of America will provide $4 billion in shares as a fee for the asset guarantee.
Bank of America shares closed down $1.88, or 18.4 percent, at $8.32 on Thursday, after falling to their lowest in more than 17 years on concerns the company does not have the ballast to weather the financial crisis.
The bank, based in Charlotte, North Carolina, will offer more details on Friday as it is due to report fourth-quarter results at 7 a.m. EST (1200 GMT).
Late Thursday, Bank of America said it was moving up its release from Jan. 20.
