$20 billion in Tarp aid for Bank of America after Merrill losses

Bank of America will receive a $20 billion cash injection and guarantees on $118 billion of debt in return for carrying through its acquisition of Merrill Lynch at the start of the year.

Shortly after the bank agreed to take over Merrill Lynch on September 15, it discovered "capital reductions" which "prompted discussions for government assistance to complete the transaction". The US Treasury has agreed to buy $20 billion of newly issued 8% preferred stock, and will receive an additional $4 billion of stock in exchange for a guarantee deal covering a pool of $118 billion in loans and mortgage-linked assets.

Today, Bank of America released fourth-quarter results for itself and Merrill Lynch, which lent weight to its argument. The two banks reported separately, as the merger only went ahead on January 1. The bank reported writedowns of $4.61 billion in the quarter, with the corporate and investment banking business making a net loss of $2.44 billion once the writedowns had been offset by higher net interest income and wider credit spreads. Overall, Bank of America lost a net $1.79 billion in the quarter.

This figure was dwarfed by comparison with Merrill Lynch, which reported $15.31 billion net losses in the fourth quarter. The bank blamed "severe market dislocations" for the losses, which include $9.74 billion writedowns on monoline exposures, leveraged loans, goodwill and commercial real estate. The head of Merrill Lynch's investment banking group, Gregory Fleming, resigned last week.

The guarantee will cover a pool of assets which "represent two-thirds of Merrill's fourth-quarter losses", Bank of America's chief financial officer Joe Price told a conference call today. The pool includes mortgage-backed securities (MBSs), corporate loans, derivatives linked to MBSs and loans, and various hedges, with assets worth $37 billion at current book value and derivatives with potential losses of $81 billion. Bank of America will take the first $10 billion of any losses, with the US government taking 90% of any further losses.

The deal comes with conditions: Bank of America's dividend will be limited to $0.01 per share per quarter for the next three years without US government permission, and the bank's executive compensation plan will have to meet government approval.

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