The U.S. government is close to committing billions in additional aid to Bank of America Corp. as the nation's largest bank by assets tries to digest its Jan. 1 acquisition of Merrill Lynch & Co., according to people familiar with the situation.
The discussion began in mid-December when Bank of America, already the recipient of $25 billion in federal rescue funds, told the U.S. Treasury Department it was unlikely to complete its purchase of the ailing Wall Street securities firm because of Merrill's larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.
Treasury, concerned the deal's failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte, N.C. lender on the "formulation of a plan" that includes new government capital. The terms are still being finalized, this person said, and details are expected to be announced with Bank of America's fourth-quarter earnings, due out Jan. 20.
Any possible arrangement might protect Bank of America from losses on Merrill's bad assets. There would be a cap on the amount of losses the bank would have to absorb with the federal government being on the hook for the remainder, according to one person familiar with the matter.
The possible deal is further evidence of the banking system's delicate condition and its hunger for more capital, despite billions of dollars already invested in financial institutions by the federal government. Thus far, Bank of America has received $25 billion in federal rescue aid, including $10 billion Merrill Lynch would have received if the sale to Bank of America had not closed.
The Treasury has committed the entire first half of its $700 billion Troubled Asset Relief Program, although some funds remain unspent, and Congress has yet to release part two. The Federal Reserve also has wide ranging powers to intervene to aid financial institutions, as does the Federal Deposit Insurance Corp.
The talks with Bank of America were driven by Treasury Secretary Henry Paulson, people familiar with the matter said, because he was concerned that without help the deal wouldn't close, leaving Merrill adrift. The merger did close Jan. 1 with the understanding the two sides would hammer out a plan, said a person familiar with the talks.
Bank of America is expected by some analysts to report a loss for the fourth quarter, or at least a smaller profit than expected. It is not known exactly how much Merrill lost in the same time period.
Bank of America is also reeling from two high-level Merrill departures within a week and concerns about cultural tensions between the two firms.
Although its heft and diversity helped buffer Bank of America through the early stages of this financial crisis, the U.S. bank is now broadly exposed to the nation's economic ills and is faced with a formidable set of challenges.
With its recent acquisitions of Countrywide Financial Corp. and Merrill, the Charlotte, N.C. lender is now a major player in every corner of the battered U.S. financial system, from credit cards and home mortgages to underwriting, merger advice and wealth management, all of which are under stress during one of the deepest recessions since World War II.
Analysts, worried about rising unemployment and a slew of problems weighing on the U.S. consumer, have been slashing Bank of America's estimates for the fourth-quarter. Some are predicting a loss and arguing that Bank of America will be forced to cut its dividend once again as a way of shoring up capital.
Jeffrey Harte of Sandler O'Neill & Partners, citing capital markets losses and rising credit costs, revised his fourth-quarter forecast this week to a loss and predicted $2.3 billion in write downs associated with collateralized debt obligations and subprime mortgage backed securities. Citigroup Inc. analyst Keith Horowitz said the bank might record a $3.6 billion fourth-quarter loss.
CEO Kenneth Lewis has already recommended his board not award top executives bonuses for 2008, warning that performance would be below expectations. He is under pressure to show the bank is grappling with its problems, beyond the 30,000-35,000 job cuts already announced, and making significant contributions to a U.S. recovery after receiving $25 billion in federal rescue aid.
To that end, the bank intends to break out new loan originations made during the quarter, a first-time disclosure it hopes will mitigate concerns about new lending.
Mr. Lewis was in New York this week meeting with Merrill executives and making a surprise appearance at a town hall-style conference on Monday broadcast to Merrill's 17,000 financial advisers, according to people familiar with the matter.