WASHINGTON – The federal government has agreed to invest another $20 billion in Bank of America Corp. (NYSE: BAC) and protect the bank against deep losses on about $118 billion in loans and assets, most of which it acquired along with Merrill Lynch & Co. Inc.
In exchange, BofA “will comply with enhanced executive-compensation restrictions and implement a mortgage-loan modification program,” the U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said in a joint statement early this morning, just hours before BofA released a report that included its first quarterly loss since 1991.
Also today, the R.I. Department of Labor and Training confirmed that BofA plans to lay off at least 121 workers at a facility in Lincoln. The news came in a mandatory notice the bank filed with state officials, DLT spokeswoman Laura Hart told Providence Business News. The bank reportedly began notifying workers on Jan. 8, and the layoffs are expected to take effect March 10, Hart said.
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A bank spokeswoman declined to discuss the layoff plans, noting that BofA last month announced plans to trim up to 35,000 jobs over the next three years – some through attrition – in part to eliminate redundancies after its acquisition of Merrill Lynch. (READ MORE)
Meanwhile, in its corporate financial report, BofA posted a full-year 2008 profit of $4.01 billion, down from $14.98 billion in all of 2007. But for the final three months of 2008, the bank posted a loss of $1.79 billion, or 48 cents per diluted share, compared with a year-ago profit of $268 million, or 5 cents.
“Results include Countrywide Financial, which Bank of America purchased on July 1, but not Merrill Lynch & Co.,” the bank said in its report. Those results would have been even grimmer had they included the estimated $15.31 billion fourth-quarter loss at Merrill Lynch, which BofA acquired on New Year’s Day. (READ MORE)
“In view of the continuing severe conditions in the markets and economy, the U.S. government agreed to assist in the Merrill acquisition by making a further investment in Bank of America of $20 billion in preferred stock, carrying an 8-percent dividend rate,” the bank said in its quarterly report.
The new federal investment – made through the Treasury’s Target Investment Program (TIP), which aims to stabilize troubled institutions and foster confidence and stability in the financial markets – brings the government’s stake in BofA to $45 billion, including the $25 billion it received in October through the Treasury’s Capital Purchase Program (CPP), which allows the federal government to buy shares of healthy banks, in hopes the cash infusion will help thaw the credit markets. (READ MORE) Both programs are part of the Troubled Assets Relief Program (TARP) established this fall by the U.S. Emergency Economic Stabilization Act of 2008 (EESA).
“In addition,” BofA said, “the government has agreed to provide protection against further losses on $118 billion in selected capital markets exposure, primarily from the former Merrill Lynch portfolio. Under the agreement, Bank of America would cover the first $10 billion in losses and the government would cover 90 percent of any subsequent losses. Bank of America would pay a premium of 3.4 percent of those assets for this program.”
The new guarantees are similar to the toxic-asset protection the government pledged in November to Citigroup Inc. (NYSE: C), the only bank that has received more EESA support than BofA. The Citi guarantees will protect the company against “unusually large” losses on “approximately $301 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet,” according to final terms the Treasury Department released today.
BofA already was participating in the enhanced account and debt guarantees offered through the FDIC’s Temporary Liquidity Guarantee (TLG) program (READ MORE), which the federal agency today announced it will extend to 10 years from the previous three, “where the debt is supported by collateral and the issuance supports new consumer lending.”
BofA’s CEO, Kenneth D. Lewis, has been widely criticized for backing the bank’s recent takeovers of two troubled financial giants: mortgage lender Countrywide Financial Corp. and brokerage Merrill Lynch. The latter move was encouraged by federal officials – who, when BofA considered pulling out of the acquisition because of Merrill’s worse-than-anticipated results, insisted the deal must go through, three people with knowledge of the transaction told Bloomberg News – because of fears of the effect on the global markets if Merrill was to fail. But since the deal was announced in September, BofA shares have lost more than 75 percent of their value.
“Bank of America has all kinds of problems with its acquisitions,” Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Md., told Bloomberg earlier this week. “They’ve been so acquisitive, they find themselves with very little in tangible equity.”
Since Lewis took over as CEO in 2001, BofA has spent $129 billion on acquisitions. Besides Merrill and Countrywide, its purchases have included regional lenders FleetBoston Financial Corp. and LaSalle Bank, credit-card issuer MBNA and investment manager U.S. Trust Co.
But now, “this thing is unraveling so fast, Lewis may know his job is lost,” Paul Miller, an analyst at Friedman Billings Ramsey Group Inc. in Arlington, Va., told Bloomberg News this morning.
In a conference call this morning, however, Lewis seemed confident, telling investors that, when the economy improves, “you will see the benefits.”
Meanwhile, in a move aimed at stemming losses and raising capital, the bank last week sold $2.8 billion of its stake in the China Construction Bank.
Bank of America Corp. (NYSE: BAC) is the nation’s largest bank, with assets of $1.82 trillion as of Dec. 31. Additional information is available at www.BankofAmerica.com.
Additional information about federal financial rescue efforts is available at EconomicRecovery.gov.
