Bank of America Corp was rescued by the US government today through a $20 billion bailout and a guarantee for almost $100 billion of potential losses on toxic assets to cushion the blow from a deteriorating balance sheet at Merrill Lynch & Co, its recently acquired brokerage.
The bailout makes Bank of America the biggest recipient of taxpayer money next to Citigroup as the government pours cash into the nation's banks to plug holes left by bad loans.
The worst housing crisis since the Great Depression and the worst recession in many years have hammered US banks.
The capital is on top of $25 billion that Bank of America previously got from the Treasury Department's Troubled Asset Relief Program (TARP) in October and is the latest indication that authorities are still struggling to come to grips with the financial crisis that began about 18 months ago.
In another bid to shore up banks in general, the government's Federal Deposit Insurance Corp. said it would propose lengthening the term on bank debt that it is prepared to guarantee to 10 years from three years. Banks must use the proceeds for new consumer lending.
Both Citi and BofA, once the dominant US banks, face mounting pressure from investors who question whether they have enough capital to cope with a tidal wave of bad debts.
This crisis of confidence sent their shares plummeting yesterday, with Bank of America's stock sinking as much as 28 per cent to $7.35, its lowest in more than 17 years, and Citigroup's declining 26 per cent to just $3.36.
They both later recovered some of the losses, with BofA last quoted at $8.89 and Citi at $3.98.
More details about their condition will surface early Friday, when the two banks report quarterly results. Citigroup is widely expected to report a huge loss, and some analysts also expect Bank of America to report a loss. Both brought forward their releases from next week.
In return for the bailout, Bank of America, which just a few months ago was trumpeting the Merrill takeover as a coup, agreed to cut its dividend to 1 cent per share from 32 cents and cap executive pay - concessions similar to those made by Citigroup when it was rescued in November.
The dividend cannot be increased without government approval in the next three years.
The guarantee also resembles the $306 billion backstop that Citigroup received. Bank of America will assume the first $10 billion loss on a pool of $118 billion of toxic assets, the US government will take the next $10 billion, and the US will assume 90 per cent of all further losses, with BofA responsible for the remaining 10 percent. The assets are mainly mortgage-related assets inherited from Merrill.
A US official said President-elect Barack Obama's transition team had been notified of the Bank of America negotiations. Earlier, a financial policy source told Reuters that both President George W. Bush and Obama, who takes over on Tuesday, have signed off on the package of support.
Reuters