Bank of America Gets $138 Billion Bailout as Merrill Takeover Backfires

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By Jason Simpkins
Managing Editor
Money Morning

Bank of America Corp. (BAC) received its third capital injection from the U.S. government Friday, after the company posted a fourth-quarter loss of $1.79 billion and absorbed even greater losses from its takeover of Merrill Lynch.

The government plans to transfer the $20 billion to Bank of America by the end of the day in exchange for preferred stock shares with an 8% dividend. That will bring the government's total investment in BofA up to $45 billion dollars. The company received $15 billion in government funds in October and another $10 billion last Friday to assist with its takeover of Merrill Lynch.

The government will also guarantee $118 billion of Bank of America assets, including commercial and real estate holdings and

credit default swaps. Bank of America will be required to absorb the first $10 billion of losses from its pool of assets, the "large majority" of which were assumed with the purchase of Merrill Lynch. BofA will cover just 10% of any losses incurred beyond that point, and the U.S. Federal Reserve and the Federal Deposit Insurance Co. will split what's left of the tab.

The Fed will backstop assets with a loan, after the government's first $10 billion in losses, shared by the Treasury and the FDIC. Bank of America's 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, Bloomberg News reported.

The government took similar action in November to prop up Citigroup Inc. (C), injecting $20 billion into the floundering financial institution, which had already received $25 billion in Troubled Asset Relief Program (TARP) funds. In the case of Citi, the government agreed to backstop more than $300 billion in troubled assets.

Citigroup announced it would be forced to split its business in two after a bigger-than-expected $8.3 billion quarterly loss.

Bank of America Chief Executive Officer Ken Lewis said on a conference call with investors that his company realized soon after its decision to acquire Merrill in September that losses were accelerating beyond expectations. BofA considered abandoning the deal, but the government wouldn't allow it.

"As we saw the anticipated loss accelerating, we reevaluated our rights under the deal," Lewis said. "The government was under the view that walking away would cause significant concerns and serious systemic harm to the financial markets."

Merrill Lynch reported a $15.31 billion fourth-quarter loss, and Bank of America has warned its shareholders to brace for even bigger losses in coming quarters.

"We did think we were doing the right thing for the country," Lewis said. "These are extraordinary times. The credit markets literally hit a wall, and nobody lending to consumers or who is in the capital markets is immune."

The company said it would shed 35,000 jobs to reduce annual costs by about $7 billion, and has slashed its dividend pay out from 32 cents a share to just one cent. Earlier this week, BofA sold its 19% stake in China Construction Bank Corp. in a desperate bid to raise more capital.

As for the government, nearly 13% of the first $350 billion in TARP funds went to Bank of America. And less than $60 billion remain. Congress has already approved the release of the remaining $350 billion in TARP funds, but questions linger about how much good the money has done so far. Credit remains tight, and while some lenders still appear vulnerable, others are using TARP money for to expand their own operations.

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