Bank Owned by America: We the People Become Largest Shareholder in Bank of America

January 16, 2009 at 7:11 am Leave a comment

bo-america-b.jpgKenneth Lewis gambled on bold acquisitions to build Bank of America into the nation’s largest bank.

But the need for fresh government support to grapple with the newly revealed losses at Merrill Lynch, the brokerage firm he snapped up in a rapid-fire arrangement at the height of the financial crisis in September, raises questions about whether the bank has gone a deal too far.
Two weeks after closing its purchase of Merrill Lynch at the urging of U.S. regulators, the government cemented a deal at midnight Thursday to supply Bank of America with a fresh $20 billion capital injection and absorb as much as $98.2 billion in losses on toxic assets, according to people involved in the transaction.
The bank had been pressing the government for help after it was surprised to learn that Merrill would be taking a fourth-quarter write-down of $15 billion to $20 billion, according to two people who have been briefed on the situation, in addition to Bank of America’s rising consumer loan losses.
The second lifeline brings the government’s total stake in Bank of America to $45 billion and makes it the bank’s largest shareholder, with a stake of about 6 percent.
The program is modeled after a larger one engineered to stabilize Citigroup as its stock price plummeted in late November, but it appears to have had limited success. Under the terms, Bank of America will be responsible for the first $10 billion in losses on a pool of $118 billion in illiquid assets, including residential and commercial real estate and corporate loans, and that will remain on its balance sheet.
The Treasury Department and the Federal Deposit Insurance Corp. will take on the next $10 billion in losses. The Fed will absorb 90 percent of any additional losses, with Bank of America responsible for the rest.
In exchange for the new support, Bank of America will give the government an additional $4 billion stake in preferred stock. It has also agreed to cut its quarterly dividend to a penny, from 32 cents, and accept more stringent restrictions on executive pay.
The FDIC announced separately that it would soon propose to extend its guarantee on supporting new consumer lending to 10 years, from 3 years.
“The U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks,” regulators said.
With losses mounting in the financial industry, other banks may eventually feel compelled to turn to the government for assistance, and the program could to used for other big banks. Taxpayers could end up guaranteeing hundreds of billions of dollars of banks’ toxic assets.
“The financial services sector still needs more equity,” said Frederick Cannon, the managing director at Keefe, Bruyette & Woods. “TARP was announced in mid-September and most of the initial decisions were based on the state of the economy then. The economy has gotten a heck of a lot worse.”
Government officials said that they did not have new money to allocate for this assistance, so they used funds that was already allocated from the $350 billion bailout fund for other banks or for future stabilization programs. The officials said that even though Citigroup’s stock had tumbled since November, that bank’s stock price might not be the best indicator of whether the program was working.
Bank of America’s troubles are only adding to the worries. Lewis had earned a reputation for taking big bets that helped transform NationsBank, a small lender, into a consumer powerhouse with bicoastal branches — and was often accused of overpaying. It snapped up Bank of America and took on its name, then followed with flashy deals for FleetBoston Financial in 2003 and then the credit card giant MBNA in 2006. That was followed by US Trust and LaSalle Bank of Chicago a year later.
Last year, Lewis’s bank also bought Countrywide Financial Corporation, the troubled mortgage giant that has come to symbolize many of the excesses of the subprime mortgage era. That made Bank of America the biggest player in every major financial service but wealth advice.
Even before the most recent deal with Merrill closed, troubles began to surface. At the time, shareholders liked the strategic fit of adding Merrill Lynch, the nation’s biggest brokerage firm, to the nation’s biggest bank. Still, they worried that Lewis had paid a hefty premium — or underestimated Merrill’s losses — in the merger stitched together over the mid-September weekend that Lehman Brothers filed for bankruptcy.
When the deal was announced, Lewis said that he had considered buying Merrill months earlier but was not comfortable with its mortgage exposure. John Thain, the chief executive of Merrill Lynch, said he had cleaned up much of his company’s problems. “We have been consistently cleaning up the balance sheet, repairing the damage that was done over the last few years,” Thain said.
Lewis praised Thain for decreasing risks at the firm and said that Merrill’s capital levels were in good shape.
As it turned out, more problems were lurking. In December, when executives at Merrill began tallying losses on its mortgage investments, they were found to exceed previous estimates. The write-downs will total between $15 billion and $20 billion, possibly its largest ever, according to two people who have been briefed on the situation, and include mortgage assets, commercial real estate and other credit investments.
When it notified Bank of America of such gaping write-downs, the bank became fearful it would not have the capital to cover them. The revelations, which came just weeks before the merger was expected to close, prompted Bank of America to ask the government for additional help.
Bank of America told regulators in December that it might walk away from Merrill because of mounting losses at the brokerage. But the regulators, concerned Merrill might founder, urged Lewis to press ahead. Given the severity of the situation, government officials said they needed to take immediate action to avert a systemic risk.
Still, the Merrill deal has not been any easy deal for Lewis to digest. “He made a bet. He bought the retail broker operation, and in a normal environment that’s a gold mine,” said Brad Hintz, an analyst with Sanford C. Bernstein & Company. “The challenge that Bank of America has is, can they keep their hands off of the retail brokerage operation, because their history in terms of acquisitions isn’t really perfect.”
Source: IHT

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