Bank of America Corp, the largest US bank by assets, was rescued by the US government on Friday through a $20-billion bailout and a guarantee for $118 billion of potential losses on toxic assets to cushion the blow from a deteriorating balance sheet at Merrill Lynch & Co, its recently acquired brokerage. The bank rose 63 cents, or 7.6%, to $8.95 in early trading at 6.21 am in New York.
The bailout makes Bank of America the biggest recipient of taxpayer money next to Citigroup, as the government pours cash into the nation?s banks to plug holes left by bad loans. The worst housing crisis since the Great Depression and the worst recession in many years have hammered US banks.
The capital is on top of $25 billion that Bank of America previously got from the treasury department?s Troubled Asset Relief Programme (Tarp) in October and is the latest indication that authorities are still struggling to come to grips with the financial crisis that began about 18 months ago.
The Charlotte, North Carolina-based company also posted its first loss since 1991. In a statement issued on Friday, Bank of America announced a fourth-quarter loss of $1.79 billion, compared with net income of $268 million a year earlier. Results didn?t include a $15.3 billion loss at Merrill, whose acquisition was completed this month.
In return for the bailout, Bank of America, which just a few months ago was trumpeting the Merrill takeover as a coup, agreed to cut its dividend to a penny per share from 32 cents and cap executive pay?concessions similar to those made by Citigroup when it was rescued in November. The dividend cannot be increased without government approval in the next three years.
Bank of America?s losses, coupled with the federal $138-billion lifeline, raise doubts about the future of CEO Kenneth D Lewis, who engineered takeovers of unprofitable New York-based Merrill and ailing mortgage lender Countrywide Financial Corp during the market slump. Bank of America plummeted 75% in New York trading through Thursday since the Merrill deal was announced in September.
?This thing is unravelling so fast Lewis may know his job is lost,? said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc in Arlington, Virginia, who has an ?underperform? rating on Bank of America. The management team has ?lost credibility,? he said.
A US official said President-elect Barack Obama?s transition team had been notified of the Bank of America negotiations. Earlier, a financial policy source said that both President George W Bush and Obama, who takes over on Tuesday, have signed off on the package of support.