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Rediff.com  » Business » US gives $138 bn lifeline for Bank of America

US gives $138 bn lifeline for Bank of America

January 16, 2009 15:44 IST

In yet another rescue act, the Federal government will inject $20 billion of fresh capital into financial services major Bank of America, apart from standing guarantee to its toxic assets worth $118 billion.

The latest move would help Bank of America absorb a major chunk of losses incurred after the acquisition of collapsed Merrill Lynch.

"The US government entered into an agreement on Friday with Bank of America to provide a package of guarantees, liquidity access, and capital as part of its commitment to support financial market stability," the Federal Reserve, Treasury and Federal Deposit Insurance CorpĀ said in a joint statement on Thursday.

While the Treasury will invest $20 billion in the firm in return for preferred stocks, FDIC, along with the Treasury, will guarantee bad assets worth $118 billion.

Bank of America would also comply with enhanced executive compensation restrictions.

Concerns about the financial health of the company had sparked fears about the country's banking system and shares of Bank of America even lost nearly 20 per cent on Thursday.

The bank, which recently acquired Merrill Lynch, has already received $25 billion from the Troubled Asset Relief Program.

The fresh capital of $20 billion would come from $700-billion worth TARP funds, in exchange for preferred stocks, with an eight per cent dividend to the Treasury.

"Treasury and the Federal Deposit Insurance Corporation would provide protection against the possibility of unusually large losses on an asset pool of about $118 billionĀ of loans, securities backed by residential and commercial real estate loans, and other such assets," the statement said.

Most of Bank of America bad assets were assumed after the buyout of Merrill Lynch.

Noting that the assets would remain on Bank of America's balance sheet, the statement said that "as a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC".

The Treasury has already pledged the first-half of the mega $700-billion bailout package. On Thursday, the Senate passed the request by President George Bush to release the second-half of the rescue plan.

The request was made by Bush on behalf of President-elect Barack Obama.

On providing capital and guaranteeing toxic assets of Bank of America, the statement read that with these transactions, the government is taking the actions necessary to strengthen the financial system and protect taxpayers and the country's economy.

On Thursday, Bank of America shares took a severe beating on the New York Stock Exchange. The scrip plunged 18.43 per cent to $8.32.

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