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Bank of America gets $138bn lifeline
By Sunny Tucker in Hong Kong
Published: January 15 2009 23:44 | Last updated: January 16 2009 08:13
Bank of America will on Friday receive $20bn in fresh capital from the US government and a guarantee on a further $118bn of potential losses on toxic assets.
The emergency bail-out will help to cushion the blow from a deteriorating balance sheet at Merrill Lynch, the brokerage BoA acquired earlier this month.
EDITOR’S CHOICE
Renewed stability fears hit banks - Jan-15
Merrill’s troubles anger BofA executives - Jan-16
Citi expected to show loss of at least $6bn - Jan-15
Merger revelations raise legal questions - Jan-16
Lex: US banking blues - Jan-15
Short View: Frightening financials - Jan-16
Details of the BoA rescue package were released in Washington DC in the early hours of Friday morning US time, in a joint statement from the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation.
The capital injection comes the day after US lawmakers voted to release a second tranche of funding under the $700bn Troubled Asset Relief Program, and just hours before BoA is scheduled to report its fourth quarter earnings.
The package is on top of the $25bn BoA received from Tarp funds last October, and underscores the depth of the financial difficulties affecting the world’s leading banks. A US housing crisis and credit-led recession has thrown the balance sheets of its top financial institutions in turmoil.
Under the terms of the deal BoA will receive $20bn in exchange for preferred stock.
BoA will absorb the first $10bn loss on a pool of $118 of toxic assets and the Treasury and FDIC the next $10bn. Ninety per cent of losses beyond that will be absorbed through a loan from the Federal Reserve. The assets are largely mortgage-related securities inherited from Merrill Lynch.
In return for the financial assistance, BoA has agreed to cut its dividend to one cent per share from 32 cents and cap executive pay.
The guarantee on toxic assets mirrors the $300bn backstop provided by the US government last November to Citigroup, which is also scheduled to report its fourth quarter earnings on Friday.
Asian stock markets rallied on the news from Washington, with Japan’s Nikkei average climbing 3.1 per cent.
The intensified government support for banks came after a day of market turbulence on both sides of the Atlantic on Thursday that saw Ireland nationalise its third-biggest lender while BofA shares fell 18 per cent and Citigroup dropped 15 per cent.
The market turmoil was fed by rumours that a big US bank such as Citi could be nationalised. Sheila Bair, head of the FDIC, played down such speculation, telling reporters: “I’d be very surprised if that happened.”
The Senate earlier voted 52-42 to approve the second half of emergency funds from the troubled asset relief programme following intensive lobbying on Capitol Hill by officials from Barack Obama’s transition team.
Mr Obama, who had threatened to veto the bill if the vote went the other way, promised Democratic waverers that he would use up to $100bn of the second tranche in “a sweeping effort” to help struggling homeowners.
“We will implement smart, aggressive policies to reduce the number of preventable foreclosures,” said Lawrence Summers, who will head Mr Obama’s National Economic Council, in a letter to lawmakers on Thursday.
Lawmakers from both parties praised Mr Obama for having consulted them extensively and given undertakings that disbursement of Tarp II would be more transparent and accountable than the first half.
Ireland nationalised Anglo Irish Bank after the share price of the country’s third-largest lender had collapsed in recent days amid reports of large-scale withdrawals.
By Sunny Tucker in Hong Kong
Published: January 15 2009 23:44 | Last updated: January 16 2009 08:13
Bank of America will on Friday receive $20bn in fresh capital from the US government and a guarantee on a further $118bn of potential losses on toxic assets.
The emergency bail-out will help to cushion the blow from a deteriorating balance sheet at Merrill Lynch, the brokerage BoA acquired earlier this month.
EDITOR’S CHOICE
Renewed stability fears hit banks - Jan-15
Merrill’s troubles anger BofA executives - Jan-16
Citi expected to show loss of at least $6bn - Jan-15
Merger revelations raise legal questions - Jan-16
Lex: US banking blues - Jan-15
Short View: Frightening financials - Jan-16
Details of the BoA rescue package were released in Washington DC in the early hours of Friday morning US time, in a joint statement from the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation.
The capital injection comes the day after US lawmakers voted to release a second tranche of funding under the $700bn Troubled Asset Relief Program, and just hours before BoA is scheduled to report its fourth quarter earnings.
The package is on top of the $25bn BoA received from Tarp funds last October, and underscores the depth of the financial difficulties affecting the world’s leading banks. A US housing crisis and credit-led recession has thrown the balance sheets of its top financial institutions in turmoil.
Under the terms of the deal BoA will receive $20bn in exchange for preferred stock.
BoA will absorb the first $10bn loss on a pool of $118 of toxic assets and the Treasury and FDIC the next $10bn. Ninety per cent of losses beyond that will be absorbed through a loan from the Federal Reserve. The assets are largely mortgage-related securities inherited from Merrill Lynch.
In return for the financial assistance, BoA has agreed to cut its dividend to one cent per share from 32 cents and cap executive pay.
The guarantee on toxic assets mirrors the $300bn backstop provided by the US government last November to Citigroup, which is also scheduled to report its fourth quarter earnings on Friday.
Asian stock markets rallied on the news from Washington, with Japan’s Nikkei average climbing 3.1 per cent.
The intensified government support for banks came after a day of market turbulence on both sides of the Atlantic on Thursday that saw Ireland nationalise its third-biggest lender while BofA shares fell 18 per cent and Citigroup dropped 15 per cent.
The market turmoil was fed by rumours that a big US bank such as Citi could be nationalised. Sheila Bair, head of the FDIC, played down such speculation, telling reporters: “I’d be very surprised if that happened.”
The Senate earlier voted 52-42 to approve the second half of emergency funds from the troubled asset relief programme following intensive lobbying on Capitol Hill by officials from Barack Obama’s transition team.
Mr Obama, who had threatened to veto the bill if the vote went the other way, promised Democratic waverers that he would use up to $100bn of the second tranche in “a sweeping effort” to help struggling homeowners.
“We will implement smart, aggressive policies to reduce the number of preventable foreclosures,” said Lawrence Summers, who will head Mr Obama’s National Economic Council, in a letter to lawmakers on Thursday.
Lawmakers from both parties praised Mr Obama for having consulted them extensively and given undertakings that disbursement of Tarp II would be more transparent and accountable than the first half.
Ireland nationalised Anglo Irish Bank after the share price of the country’s third-largest lender had collapsed in recent days amid reports of large-scale withdrawals.
