Bank of America Urged to Pay U.S. for Merrill Accord

Following up on yesterday's post:
July 15 (Bloomberg) -- Bank of America Corp. benefited from implied federal backing on about $118 billion of Merrill Lynch & Co. assets and owes the government compensation, the chairman of a House of Representatives committee studying the purchase of Merrill said.

“If you or anyone at Bank of America made a commitment, verbal or otherwise, to enter into this deal with the United States government, I urge you to honor that commitment,” Edolphus Towns, a New York Democrat, said in a letter yesterday to Chief Executive Officer Kenneth Lewis that was obtained by Bloomberg News. “It is the right thing to do.”

Regulators say Bank of America owes at least part of a $4 billion fee it agreed to pay in January because the company benefited from U.S. backing on Merrill assets such as mortgage- backed bonds, Bloomberg News reported on July 13, citing people familiar with the matter. The Charlotte, North Carolina-based bank says it owes the Treasury nothing because the plan was never put into effect, according to the people, who declined to be identified because the negotiations are confidential.
Bank of America disclosed the guarantees Jan. 16, along with its first quarterly loss in 17 years. Its news release headlined the guarantee and called the program an “agreement.”
The plan called for the Federal Reserve, the Treasury, and Federal Deposit Insurance Corp. to participate in a loss-sharing agreement for loans, mortgage-backed securities and financial instruments that could last 10 years, according to company and Treasury documents. Most of the holdings came from Merrill Lynch, acquired Jan. 1.

The bank would pay a $4 billion fee in preferred stock and warrants, plus an annual fee of 20 basis points for undrawn amounts of the $118 billion, or $236 million, according to Treasury’s summary of terms, with more fees if the bank used the program. A basis point is 0.01 percentage point.
Repeating myself:

In any case, this shows one more time that government intervention leads to unintended consequences.

These consequences are going to be major because, irrelevant of whether BofA is right or wrong:
  • BofA will not be able to get any backing when the markets collapse.
  • The public image of BofA is going to get hurt.
  • BofA has put itself in a position where the government can now do anything they want. They are owned...

No comments: