Bank of America Gets $20 Billion More from FedsLatest Injection Seen as Move to Stabilize Banking Sector
The Federal Reserve, Treasury and the FDIC cut a late-night deal with the largest U.S. bank, as it faces more problems with its loan portfolio and recent purchase of Merrill Lynch in the middle of the global recession.
The three agencies agreed early Friday to extend another $20 billion to Bank of America from the $700 billion bank bailout. As part of the agreement, Bank of America will pay a dividend on the money and will submit to more restrictions on executive pay. The $20 billion will be transferred today to the banking giant.
Bank of America will pay the government an 8 percent dividend on the $20 billion. It also agreed to implement an expanded program to modify mortgages to help homeowners avoid foreclosures. One other stipulation of the loan is the reduction of its stock dividend to a penny per share for the next three years.
Aside from the $20 billion, the government will provide guarantees against Bank of America's losses on $118 billion in a range of loans and securities backed by residential and commercial real estate loans. The largest part of these loans and securities were assumed by Bank of America when it bought Merrill Lynch in a deal that closed in early January.
Bank of America already received $25 billion from the $700 billion bailout fund, but found it needed more help after losses related to its Merrill Lynch acquisition. Merrill reported losses of more than $15 billion in the last quarter. Bank of America on Friday, after receiving the bailout, posted its first quarterly loss in 17 years, and chief executive Kenneth Lewis says net losses may continue for several quarters.
Merrill's Problems Stay At BoA
Financial industry analyst John Jay is puzzled as to why the problems at Merrill were ot seen sooner. "It's difficult to envision that the Fed, the Treasury and FDIC were not privy to the BoA/Merrill merger talks," says Jay, a senior analyst at Aite Group. "Though the problem assets will remain on BoA books, and capital must be reserved against them, any returns beyond current expectations (net of the "fee arrangement") from these assets will directly accrue to BoA."
He says it would not be surprising if this "playbook" is replayed when subsequent mega-bank mergers take place and that the acquisition target owned many distressed assets.
When it comes to accountability for the use of government funds, the FDIC has been the most pro-active in this regard, he says. "It is not certain at this stage whether the new incoming administration will require the OCC, Fed and the Treasury to do likewise," Jay says.
BoA Bailout Has Positives
The Bank of America bailout isn't necessarily a negative, says veteran banker John Jackson, former senior vice president of lending at the First Bank of Louisville, Louisville, KY. "Bank of America is possibly the most important financial institution in our industry. They are often the benchmark for institutional practices and are a leader in introducing new banking products. Of all the banks in the nation, Bank of America needs to be the most sound," Jackson says.
That the Federal Reserve and the FDIC are providing more assistance to BoA sends a positive example about the stability of the entire sector, Jackson says. This event will also speed up the recovery and confidence in financial institutions in general, he observes.
The pool of funding for financial institutions is not dry, and more banks are expected to be availed to the funds. "The additional assistance given to Bank of America demonstrates the need for flexibility, which the additional portion of TARP that was just approved by the Senate will help provide," says Doug Johnson, Senior Policy Advisor at the American Bankers Association. The Obama administration has committed to seeing that community banks and other small businesses get assistance during the next round.
He adds that the federal banking agencies have approved hundreds of Capital Purchase Program (CPP) applications by healthy community banks, "and many more are in the pipeline for approval, and the completion of the subchapter s term sheet Wednesday makes CPP available to thousands more."
Johnson adds there will be responsibilities for those banks taking TARP funds to demonstrate a commitment toward expanded lending and foreclosure forbearance.
Also on Friday, Citigroup finalized terms of a guarantee agreement with Treasury, Federal Reserve and the FDIC to help the mega-bank. In the agreement announced in November, Citigroup will get backing from the government against losses against its loan portfolio of $301 billion. (Citigroup Agreement #1104)