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 agreed early Friday to provide Bank of America with an additional $20 billion in support from the government's $700 billion financial rescue fund. Bank of America agreed to pay a dividend on the cash injection and will accept more restrictions on executive pay.
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 securities 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.
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Bank of America Corp. already had 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 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.
Bank of America agreed to pay the government an 8 percent dividend on the $20 billion capital injection. It also agreed to comply with enhanced restrictions on executive pay and benefits and implement an expanded program to modify mortgages in an effort to avoid rising foreclosures. The company also agreed to reduce its dividend to a penny per share for three years.
Under the program to cap losses on $118 billion in troubled assets, Bank of America will absorb the first $10 billion of losses on the assets and the government will cover 90 percent of any additional losses. As compensation for the new support, the government will get $24 billion in shares of preferred stock which will pay an annual interest rate of 8 percent.
Only hours after the announcement of the government lifeline, Bank of America on Friday reported a fourth-quarter loss of $2.39 billion, or 48 cents per share, down sharply from a profit of $215 million, or 5 cents per share, a year ago.
The government's agreement with Bank of America mentions "enhanced executive compensation restrictions" but doesn't elaborate. But Rep. Barney Frank, D-Mass., who heads the House Financial Services Committee, last week issued an outline of his proposal to attach strings to spending the rest of the bailout money. That plan places strict limits on executive compensation — both for companies receiving new federal money and those that already have — including a ban on any bonuses for the 25 highest paid executives.
Lawrence H. Summers, a top aide to President-elect Barack Obama, sent a letter to House and Senate leaders Thursday detailing plans for the remaining $350 billion in bailout funds, including a requirement that "executive compensation above a specified threshold amount be paid in restricted stock or similar form that cannot be liquidated or sold until the government has been repaid."
Treasury Secretary Henry Paulson, who will be leaving office Wednesday with the change of administrations, wrapped up a piece of unfinished business on Friday when the Treasury, Fed and FDIC announced they had finalized the terms of the agreement reached with Citigroup on Nov. 23. That agreement provides guarantees against losses on an asset pool of about $301 billion in loans and securities backed by residential and commercial real estate.
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 businesses.
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, 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."
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.
Fears about the stability of the financial industry had gripped Wall Street in recent days, sending stocks plunging. 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.