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Bank of America bail-out agreed Bank of America bail-out agreed
(about 3 hours later)
Bank of America will receive $20bn (£13.4bn) in fresh US government aid and $118bn worth of guarantees against bad assets.Bank of America will receive $20bn (£13.4bn) in fresh US government aid and $118bn worth of guarantees against bad assets.
The emergency funding will help the troubled bank - the US's largest - absorb the losses it incurred when it bought Merrill Lynch.The emergency funding will help the troubled bank - the US's largest - absorb the losses it incurred when it bought Merrill Lynch.
In return for the money, the US Treasury will take a stake in the bank.In return for the money, the US Treasury will take a stake in the bank.
Bank of America had been seen as one of the strongest US banks, at least until its decision to take over Merrill.Bank of America had been seen as one of the strongest US banks, at least until its decision to take over Merrill.
Shares in Bank of America fell 17.5% on Thursday as investor confidence in the banking sector took a hit.Shares in Bank of America fell 17.5% on Thursday as investor confidence in the banking sector took a hit.
The government stepped in after fears that the deteriorating capital base threatened the viability of the bank and could have posed a threat to the financial sector and the wider economy.The government stepped in after fears that the deteriorating capital base threatened the viability of the bank and could have posed a threat to the financial sector and the wider economy.
"The objective of this programme is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings and retirement security," the US Treasury said. It's a big question for Bank of America's management. They just went into an acquisition and now need aid. It looks like another bad deal with poor due diligence Peter Hahn, Cass Business School"The objective of this programme is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings and retirement security," the US Treasury said. It's a big question for Bank of America's management. They just went into an acquisition and now need aid. It looks like another bad deal with poor due diligence Peter Hahn, Cass Business School
In addition to the $20bn cash injection, the Treasury will "provide protection against the possibility of unusually large losses on an asset pool of approximately $118bn of loans".In addition to the $20bn cash injection, the Treasury will "provide protection against the possibility of unusually large losses on an asset pool of approximately $118bn of loans".
The deal guarantees residential and commercial mortgage investments, derivatives and corporate debt.The deal guarantees residential and commercial mortgage investments, derivatives and corporate debt.
RestrictionsRestrictions
In return for the aid, the bank must meet strict restrictions on executive pay.In return for the aid, the bank must meet strict restrictions on executive pay.
Bank of America has already received $25bn in capital injections from the Troubled Assets Relief Programme, known as Tarp, the bail-out fund designed to rescue banks reeling from the financial crisis.Bank of America has already received $25bn in capital injections from the Troubled Assets Relief Programme, known as Tarp, the bail-out fund designed to rescue banks reeling from the financial crisis.
Its problems intensified when it decided to take over Merrill Lynch, another giant of the US banking industry that fell victim to the global credit crunch.Its problems intensified when it decided to take over Merrill Lynch, another giant of the US banking industry that fell victim to the global credit crunch.
Bank of America underestimated the levels of debt it was taking on as a result of the deal.Bank of America underestimated the levels of debt it was taking on as a result of the deal.
"It's a big question for Bank of America's management. They just went into an acquisition and now need aid. It looks like another bad deal with poor due diligence," said Peter Hahn of The Cass Business School."It's a big question for Bank of America's management. They just went into an acquisition and now need aid. It looks like another bad deal with poor due diligence," said Peter Hahn of The Cass Business School.
"It comes down to the cost of the acquisition of Merrill and the risks associated with the deal," said Gary Townsend at Hill-Townsend Capital."It comes down to the cost of the acquisition of Merrill and the risks associated with the deal," said Gary Townsend at Hill-Townsend Capital.
Robert Peston, the BBC's business editor, said the decision to bail out Bank of America in light of the Merrill Lynch deal was an easy one.
"The US government was never going to cut up too rough when the biggest lender in America asked for a bit of additional help in absorbing the losses incurred on Merrill's holding of poisonous assets."
Bank of America had been expected to announce its fourth quarter results for 2008 next week but has brought forward the announcement to Friday.Bank of America had been expected to announce its fourth quarter results for 2008 next week but has brought forward the announcement to Friday.
On Thursday, the US Senate approved the release of the remaining $350bn of the Tarp bail-out fund.On Thursday, the US Senate approved the release of the remaining $350bn of the Tarp bail-out fund.
The Democrats in the House of Representatives also unveiled plans for a separate $825bn stimulus plan.The Democrats in the House of Representatives also unveiled plans for a separate $825bn stimulus plan.
Called the American Recovery and Reinvestment Plan, it proposes $550bn in emergency spending with $275bn in temporary tax benefits over the next two years.Called the American Recovery and Reinvestment Plan, it proposes $550bn in emergency spending with $275bn in temporary tax benefits over the next two years.