The Back Alley Archives

Jan. 16 (Bloomberg) -- Bank of America Corp., the largest U.S. bank by assets, posted its first loss since 1991 and cut the dividend to a penny after receiving emergency government funds to support the acquisition of Merrill Lynch & Co.

The fourth-quarter loss of $1.79 billion, or 48 cents a share, compared with net income of $268 million, or 5 cents, a year earlier, the Charlotte, North Carolina-based company said in a statement today. Results didn't include a $15.3 billion loss at Merrill, acquired this month.

The losses, coupled with the U.S. lifeline of $138 billion, put more pressure on Chief Executive Officer Kenneth D. Lewis to make the takeovers of Merrill and mortgage lender Countrywide Financial Corp. pay off. Lewis has drawn criticism from analysts for rescuing the two money-losing companies, and the bank told investors on a conference call today to expect more and possibly bigger losses in the quarters ahead.

``We just thought it was in the best interest of our company and our stockholders and the country to move forward with the original terms and timing'' for buying New York-based Merrill, Lewis said today. Renegotiating the deal could have cost more than it would have saved, and the government -- which insisted the deal go forward -- promised financial help in ``recognition of the position Bank of America was in,'' Lewis said.

The bank's shares rose 8.8 percent to $8.76 at 8:51 a.m. in New York trading. The quarterly loss was less than the $3.6 billion that Citigroup Inc. analyst Keith Horowitz estimated on Jan. 11. Bank of America's 32-cent dividend was reduced to one cent after being chopped from 64 cents last year.

Market Stability

Bank of America plummeted 75 percent in New York trading through yesterday since the Merrill deal was announced in September.

The government said earlier today it will invest $20 billion in Bank of America and guarantee $118 billion of assets to help the company absorb Merrill and prevent the financial crisis from deepening.

The agreement is part of a commitment to “support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington.

About three-quarters of the federal aid is intended to cushion Merrill's losses, with the rest for Bank of America, Chief Financial Officer Joe Price told investors during today's conference call.

WASHINGTON — Last fall, as Federal Reserve and Treasury Department officials rode to the rescue of one financial institution after another, they took great pains to avoid doing anything that smacked of nationalizing banks.

They may no longer have that luxury. With two of the nation’s largest banks buckling under yet another round of huge losses, the incoming administration of Barack Obama and the Federal Reserve are suddenly dealing with banks that are “too big to fail” and yet unable to function as the sinking economy erodes their capital.

Particularly in the case of Citigroup, the losses have become so large that they make it almost mathematically impossible for the government to inject enough capital without taking a majority stake or at least squeezing out existing shareholders.

And the new ground rules laid down by Mr. Obama’s top economic advisers for the second half of the $700 billion bailout fund, as explained in a letter submitted to Congress on Thursday, call for the government to play an increasing role in the major activities of the banks, from the dividends they pay to shareholders to the amount they can pay executives.

“We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “We are going to go back to a time when the government controlled the banking system.”

The approximately $120 billion aid package on Thursday for Bank of America — including injections of capital and absorbed losses — as well as a $300 billion package in November for Citigroup both represented displays of financial gymnastics aimed at providing capital without appearing to take commanding equity stakes.

Treasury and Fed officials accomplished that trick by structuring the deals like insurance programs for big bundles of the banks’ most toxic assets.

Instead of investing tens of billions of taxpayer dollars in exchange for preferred shares in the banks, which has been the Treasury Department’s approach so far with its capital infusions, the government essentially liberated the banks from some of their most threatening assets.

The trouble with the new approach, analysts say, is that it is likely to conceal the amount of risk that taxpayers are taking on. If the government-guaranteed securities turn out to be worthless, the cost of the insurance would be much higher than if the Treasury Department had simply bailed out the banks with cash in the first place.

Christopher Whalen, a managing partner at Institutional Risk Analytics, said the approach also covers up the underlying reality that the government is already essentially the majority shareholder in Citigroup.

“There’s nobody else out there to invest in them,” Mr. Whalen said. “We already own them.”

Ben S. Bernanke, chairman of the Federal Reserve Board, outlined the elements of what could become the Obama administration’s new approach to bank rescues in a speech on Monday.

Speaking to the London School of Economics, but addressing American audiences as much as European ones, Mr. Bernanke warned that the federal government had no choice but to put more money into banks and other financial institutions if it had any hope of reviving the paralyzed credit markets.

Known officially as the Troubled Asset Relief Program, or TARP, the rescue program has infuriated lawmakers in both parties, who complain that Treasury Secretary Henry M. Paulson Jr. has doled out money to banks without demanding accountability in return. Mr. Obama and his top economic advisers convinced enough lawmakers that shoring up the banks was essential to preventing a broader financial collapse, and offered written assurances that they would address the lawmakers’ biggest complaints.

But Mr. Bernanke proposed an array of alternative approaches to dealing with the banks in the months ahead, and all of those options reflected a fundamental shift from the original assumptions of the Bush administration.

Mr. Paulson had insisted that the government would be investing only in healthy banks, some of which might take over sicker rivals. The Treasury would invest taxpayer dollars in exchange for preferred shares, which would pay a regular dividend and come with warrants that would allow the government to profit from increases in company stock prices.

By contrast, Mr. Bernanke proposed various ways to fence off the troubled assets, from nonperforming loans to mortgage-backed securities that investors had stopped buying at almost any price.

(alleyinsider.com) -- As taxpayers are forced to digest the latest Wall Street-Treasury outrage--a secret bailout of Bank of America to the tune of $15 billion of capital and $120 billion of trash-asset guarantees--it's clear that, this time, someone has to be held responsible. And that someone is Bank of America CEO Ken Lewis.

Unlike Vikram Pandit at Shitigroup and John Thain at Merrill, Lewis can't blame the need for this bailout on his predecessor's idiotic bets. Bank of America needs another bailout solely because of an idiotic Ken Lewis bet: His decision three months ago to buy Merrill Lynch.

No one put a gun to Ken's head and said "You've got to buy Merrill." There wasn't some secret backroom Treasury deal where Hank Paulson forced him to take one for the team.

On the contrary, Ken Lewis bought Merrill because he had always wanted to own it and because he thought he was getting a good deal. Furthermore, he knew exactly what he was getting: A firm that, for four straight quarters had been forced to write down tens of billions of losses on idiotic bets and still had about $1 trillion of those bets on its balance sheet.

Let's walk through the possibilities:

If it didn't occur to Ken Lewis that Merrill might be forced to take additional "monstrous" writedowns (as he now reportedly describes them), he should be fired.

If it did occur to him and he didn't check this out during the due diligence process, he should be fired.

If he didn't think the global debt markets could continue to deteriorate to a level that required such writedowns, he should be fired.

If he fully expected the writedowns and just didn't realize what they would do to Bank of America's own stock price, he should be fired.
In fact, there is no scenario we can think of short of deliberate fraud by Merrill Lynch in which Ken Lewis should not be fired. His disastrous acquisition decisions--first on Countrywide and now on Merrill Lynch--have brought Bank of America to the brink of collapse. He has destroyed the firm's shareholders, and, once again, forced U.S. taxpayers to bail him and his demolished firm out.

If Ken Lewis doesn't do the right thing--accept responsibility for this disaster and resign on tomorrow's earnings call--he should be fired. Bank of America shareholders and US taxpayers deserve no less.