Friday, January 16, 2009

Bank(rupt) of America Gets Government Bailout

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This morning, only hours after getting another major infusion of bailout cash from the U.S. government, Bank of America reported its first quarterly loss in 17 years. The latest bailout became necessary because Bank of America's government arranged takeover of money- hemorrhaging Merrill Lynch (this took place after Bank of America's takeover of money- hemorrhaging Countrywide Financial). This time, it is at least being admitted that taxpayers are getting stuck with the loss. Things were so bad, that the government didn't even try to lie about. The Fed and Treasury weren't just busy with Bank of America last night either, but put the final touches on the latest scheme to keep Citigroup afloat.

While Citigroup has been struggling for survival for some time now, Bank of America was one of the few big banks and brokers that seemed t0 be getting along well enough despite the Credit Crisis. The loss of $1.79 billion, or 48 cents per share it reported today is small compared to the fourth-quarter net loss of $8.29 billion, or $1.72 per share, for Citigroup (its fifth quarterly loss in a row, but better than the $1.99 loss in the fourth quarter of 2007). However, Bank America's proposed acquisition Merrill Lynch lost a whopping $15.31 billion, or $9.62 per share, last quarter and things looked bad enough to potentially drag both companies into oblivion. Bank of America management claimed it didn't realize that Merrill's loses would be so high (makes you wonder just how accurate their loan analysis is - no wonder they thought sub-prime borrowers were good credit risks) threatened to KO the deal if the government didn't pay up.

The Treasury coughed up another $20 billion of TARP funds immediately. To this, they added a rescue package with the government agreeing to share in losses on $118 billion in residential and commercial mortgages, derivatives and corporate debt. Bank America will absorb the first $10 billion of losses, the government the next $10 billion, and the government 90 percent of the rest. Why taxpayers should get stuck paying off this debt is beyond me. Even worse, there will probably be more to pay down the road.

The Treasury was also busy coming up with a new idea for saving the beyond insolvent Citigroup. After more than a half-dozen bailouts since late 2007, the bank is still at risk of crumbling . The latest scheme is to split it into two businesses, Citicorp and Citi Holdings. Citicorp, will focus on traditional banking, while Citi Holdings will be the dumping ground for the company's riskier assets. CitiHoldings will account for $850 billion of Citigroup's $1.95 trillion in assets including CitiMortgage and CitiFinancial. It will also be in charge of Citi's 49 percent stake in the joint brokerage with Morgan Stanley, and the pool of about $300 billion in mortgages and other risky assets that the U.S. government agreed to backstop late last year. Citi's new structure is an almost complete reversal of the financial supermarket approach it adopted in the late 1990s and which everyone on Wall Street thought was one of the best ideas ever (so much for that). The company isn't out of the woods yet either. The fourth quarter earnings report showed that credit deterioration was severe from North America to Europe to Latin America to Asia.

NEXT: Inaguaration Day 2009 - Looking for a New Beginning

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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