WASHINGTON — With a new round of turmoil gripping the financial markets, the Bush administration late Thursday night rushed $20 billion in emergency funding for Bank of America.
Just months ago, Bank of America, based in Charlotte, N.C., appeared to emerge as the nation's top bank after it stepped in on Sept. 15 to purchase investment bank Merrill Lynch. After Merrill's fourth-quarter results proved worse than expected, however, the acquisition was in peril and investors have fled Bank of America in droves.
Friday morning, Bank of America Corp. announced a fourth-quarter loss of $2.39 billion, or 48 cents per share, as it suffered rising loan losses, soured investments and trading losses.
Bank of America's stock lost 40 percent of its value during the past 10 days — shares closed on Thursday in single digits for the first time in 18 years — and the taxpayer money will be used to ameliorate the losses from its acquisition of Merrill Lynch. Chief Executive Ken Lewis called it "deal of a lifetime" when it was announced.
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People familiar with the unfolding events, requesting anonymity to speak freely, said Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, with the knowledge of President-elect Barack Obama's transition team, pressured the bank to stick to its purchase of Merrill Lynch.
In addition to the $20 billion Bank of America will receive from October's bailout fund, the Federal Reserve and Treasury Department also will provide a backstop of $118 billion for its assets, which include mostly securities whose collateral are commercial or residential real-estate loans. Most of these troubled assets were assumed by Bank of America in its acquisition of Merrill Lynch.
The bank would absorb the first losses, followed by the Treasury Department and Federal Deposit Insurance Corp. The Fed could be on the hook for a large chunk of any further losses. As part of the deal, Bank of America agreed to tougher compensation restrictions and must implement a mortgage-loan modification program. Both are conditions that congressional Democrats have been demanding in exchange for any new bailout money.
The late-night rescue capped a momentous day in Washington. The Senate on Thursday authorized President Bush, on Obama's behalf, to seek the second $350 billion in Wall Street rescue money. In a letter to lawmakers, Obama's top economic adviser, Lawrence Summers, pledged far greater accounting of how the remaining funds are spent.
The funds rushed to Bank of America come from bailout money that had been promised, but not yet given, to other institutions by the Bush administration. It will fall to the Obama administration to direct new funds to these banks, which saw their promised capital injections usurped by the Bank of America crisis.
Bank of America expects to shed as many as 35,000 jobs nationwide as the banking sector crisis deepens. One top-level executive, who'd been handed a pink slip Thursday, told McClatchy that morale is at rock bottom.
"It's terrible," said the executive, who asked that his name not be used because details of his departure were still being worked out. "Everyone is worried, from the lowest employee to the highest."
Bank of America and Merrill Lynch already had received $25 billion in Wall Street bailout money last year, and the new round of aid is sure to anger the public and lawmakers in Congress. They're angry that the money injected into the banks came without strings attached and that there are few measures to gauge whether the banks are actually lending the money as was intended.
Despite the fact that the Bush administration gave almost $350 billion to banks and other financial institutions, the financial sector continues to be rocked by uncertainty. Citigroup, another of the nation's largest banks, said this week it expects to shrink by a third as it lops off parts of its business and resizes itself for a much weaker economy. It was rescued by the federal government in November.
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