Treasury, Bank of America Reach Bailout Deal

By: AP
By: AP

WASHINGTON -- The government has extended a new multibillion-dollar lifeline to one of the country's biggest banks as officials continue to struggle with a serious crisis in the financial system.

After a marathon negotiating session, the Bush administration reached an agreement early Friday to provide Bank of America with an additional $20 billion in support from the government's $700 billion financial rescue fund.

The administration, the Federal Reserve and the Federal Deposit Insurance Corp. also agreed to participate in a program to provide guarantees against losses on approximately $118 billion in various types of loans and securites backed by residential and commercial real estate loans.

The bulk of these holdings were assumed by Bank of America when it acquired Merrill Lynch in a deal that closed earlier this year.

Bank of America had already been granted $25 billion from the bailout fund that Congress passed on Oct. 3, but found it needed more as it sought to cope with rising losses related to its acquisition of Merrill Lynch.

In a joint statement, the Treasury, Fed and FDIC pledged that "the U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks."

With the latest commitment, the Bush administration has actually gone beyond the first $350 billion of the rescue program. But officials told reporters on a conference call early Friday morning that sufficient resources were available because a portion of the first $350 billion will not be spent until coming weeks.

The $20 billion which will be used to inject capital into Bank of America was to be transferred on Friday, the officials said.

There is widespread unhappiness in Congress over how the Bush administration has implemented the first phase of the $700 billion program, the largest government bailout in history.

But the Senate on Thursday turned aside an effort to block release of the second $350 billion after the incoming Obama administration pledged to utilize more of the second half of the fund to help stem mortgage foreclosures and bolster credit for consumers and small busineses.

However, Federal Reserve Chairman Ben Bernanke said in a speech Tuesday that he would like to see much of the remaining part of the rescue program devoted to bolstering the banking system, where continuing weakness is raising concerns among policymakers.

Bernanke, Treasury Secretary Henry Paulson and other government officials have struggled to restore confidence in the financial system, which has been rocked by billions of dollars in losses on mortgages and other types of loans.

The administration has focused on supplying billions of dollars to banks in the form of government purchases of bank stock in the hopes that the banks will use the fresh infusion of capital to resume more normal lending.

But faced with a new wave of loan losses as the economy sags into a deepening recession, the bailout program has met with mixed results so far.

In the joint statement, the government agencies said the new support for Bank of America was designed "to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

Regulators pushed to complete the agreement in advance of a fourth quarter earnings report scheduled later Friday by Bank of America.

Some analysts are predicting the nation's biggest bank by assets will report a loss or lower-than-expected earnings for the fourth quarter. Its board has already halved the company's dividend and could slash the payout again.

Bank of America reached the agreement to acquire investment bank Merrill Lynch back in September, a period when Wall Street was being rocked by its biggest upheavals in decades, including the biggest bankruptcy filing in U.S. history, the collapse of investment bank Lehman Brothers.

Even with the earlier $25 billion in government assistance, Bank of America's stock has been pummeled.

Shares of the Charlotte, N.C.-based bank are down more than 27 percent this year - dropping to their lowest level in 18 years.

Analysts polled by Thomson Reuters, on average, expect Bank of America to earn 8 cents per share during the quarter and $1.15 per share for 2008.

Fears about the stability of the financial industry had gripped Wall Street in recent days, sending stocks plunging. Wall Street investors are worried about another round of losses from banks, which had been especially hard hit by the worst financial crisis since the 1930s.

In the Citigroup rescue in November, the bank received a fresh $20 billion capital infusion from Treasury's bailout fund - after earlier receiving $25 billion - as well as government backing of billions of dollars in risky assets held by the bank.

Specifically, Treasury and the Federal Deposit Insurance Corp. provided a guarantee against the possibility of losses on up to $306 billion of risky loans and securities backed by New York-based Citigroup's commercial and residential mortgages. Funds from the FDIC and $5 billion from the bailout money would be used for the guarantees.

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AP Business Writers Ieva M. Augstums in Charlotte, N.C., Jeannine Aversa in Washington and Tim Paradis in New York contributed to this report.

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