Escalating credit costs forced Bank of America Corp. to report a $2.39 billion fourth-quarter loss, hours after it convinced the federal government it needed a multibillion-dollar lifeline to survive the absorption of Merrill Lynch's hefty losses.
After a marathon negotiating session, the Bush administration agreed early Friday to give Bank of America an additional $20 billion worth of fresh capital to help it stomach the losses at Merrill Lynch, which the company acquired Jan. 1. The funds are in addition to $25 billion in funds that Bank of America has already received from the government's $700 billion Troubled Assets Relief Program.
The Latest Infusion
The new infusion means Bank of America has now taken $45 billion of government aid, the same amount as Citigroup Inc. In connection with the package, Bank of America slashed its quarterly dividend to a mere penny from 32 cents and agreed to further limit executive pay and work more intensively to modify the mortgages of distressed homeowners.
The government's agreement with Bank of America mentions "enhanced executive compensation restrictions" but doesn't elaborate.
However, Rep. Barney Frank (D-MA), who heads the House Financial Services Committee, last week issued an outline of his proposal to attach strings to spending the rest of the bailout money. It would slap strict limits on executive compensation — both for companies receiving new federal money and for those that already have — including a ban on any bonuses for the 25 highest-paid executives.
Lawrence Summers, a top economic aide to President-elect Obama, sent a letter to House and Senate leaders Thursday detailing plans for the remaining $350 billion in bailout funds, including a requirement that "executive compensation above a specified threshold amount be paid in restricted stock or similar form that cannot be liquidated or sold until the government has been repaid."
Paulson Defends Financial Rescue
Treasury Secretary Henry Paulson on Friday defended his handling of the $700 billion financial rescue program, saying it has made real progress toward achieving financial stability.
Paulson said the administration had made the correct calls on major decisions in operating the program, even though he and other officials sometimes had to operate with imperfect information that was frequently changing.
The rescue program had made "real progress," he said, but he conceded that there were "plenty of challenges" remaining in the effort to stabilize the economy.
"I have always said that stability is our first priority, then recovery, then repair," Paulson said.
Protection Against Losses
Under terms of the latest agreement, the Federal Reserve and Federal Deposit Insurance Corp. also agreed to protect Bank of America against further losses on $118 billion in capital markets exposure, mainly linked to Merrill Lynch. Bank of America will cover the first $10 billion in losses and the government will cover 90 percent of any subsequent losses. As compensation for the new support, the government will get $24 billion in preferred stock, which will pay an annual interest rate of 8 percent.
In total, the government has put about $163 billion at Bank of America's disposal.
Bank of America said the rescue package will help it operate as normally as possible. The company said it extended more than $115 billion of new loans during the fourth quarter and added mortgage staff to accommodate increased refinancings and loan modifications.
Although they gained up to $1 early in the trading session, Bank of America shares fell $1.04, or 12.5 percent, to $7.28 by midday. The stock is down more than 48 percent since the beginning of the year and has dropped to its lowest level in 18 years.
From the Associated Press
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