By Binyamin Appelbaum and Neil Irwin
Washington Post Staff Writers
Friday, January 16, 2009
The federal government, once again expanding public ownership of a key financial institution, will plow another $20 billion into Bank of America and limit the company's losses on some $118 billion of troubled assets, officials said early this morning.
The bailout, which comes on top of $25 billion that the government has already invested in Bank of America, is meant to help the company absorb the troubled investment bank Merrill Lynch, a deal Bank of America closed Jan. 1. Government officials pushed the banks together in September and were sympathetic when Bank of America returned in December to ask for more public assistance, according to sources familiar with the discussions.
With this latest emergency aid package, the Bush administration has committed almost $380 billion from the $700 billion financial rescue program approved by Congress. That leaves the incoming Obama administration with control over less than half the money. Some financial analysts and government officials have concluded that more than $700 billion in public money eventually will be required.
Bank of America joins Citigroup and insurer American International Group on a list of financial giants that have required multiple rounds of help. The companies, considered by some policymakers to be too large to fail, increasingly appear hard-pressed to make it on their own. The government is now the largest shareholder in all three institutions; the latest investment in Bank of America brings the taxpayers' stake to about 6 percent.
The deal is modeled on the November bailout of Citigroup. The government will cap losses on $118 billion in troubled assets, much of it inherited from Merrill Lynch. Bank of America will take the first $10 billion in losses. Ninety percent of any additional losses will be absorbed by the Treasury Department and the Federal Deposit Insurance Corp. The Federal Reserve is providing an additional backstop.
In exchange for the government's $20 billion investment and the cap on losses, Bank of America will issue to the government $24 billion in shares of preferred stock, which will pay an annual interest rate of 8 percent.
The Charlotte company also agreed to reduce its dividend to a penny per share for three years, impose limits on executive compensation and to adopt a mortgage modification program to limit foreclosures.
The Senate voted yesterday to release the second half of the rescue money after the Obama administration committed to imposing those restrictions on companies that receive extraordinary assistance.
Bank of America will announce fourth-quarter earnings this morning. Some analysts expect the company to report its first quarterly loss in more than a decade.
The company's mounting financial problems could bode ill for other banks, because the company had appeared relatively healthy. Chief executive Kenneth D. Lewis boasted several times this fall that the bank did not need government money.
But Bank of America reversed course in December, telling government officials it could not complete the Merrill Lynch purchase without additional assistance because the investment bank's losses were larger than expected, according to people familiar with the conversations. The company believed it had enough money to cover its own losses, but not enough to cover Merrill's losses as well.
Treasury agreed in principle to provide additional support before the deal closed two weeks ago, the sources said.
While the government would help Bank of America to grow larger, Citigroup is being pressed to break itself apart. The New York giant, which also is to report earnings today, plans to announce that it will sell off as much as a third of its businesses, according to sources.
Citigroup had earlier received $20 billion from the government plus a commitment to limit the company's losses on $306 billion of troubled loans.
J.P. Morgan Chase, another financial behemoth, has not required a second round of funding to absorb its acquisitions of Washington Mutual and Bear Stearns.
J.P. Morgan Chase reported yesterday that it made $702 million in the fourth quarter, down 76 percent from the same period last year. Revenue slipped slightly, and the bank was forced to write down $2.9 billion in assets and reserve more than $4 billion against future losses.