Bank of America in Need of Additional Bailout - January 16, 2009

Have no fear the U.S. government is here. Digging deeper into the $700B rescue fund, the Treasury Department extended additional funds to Bank of America Corp. (BAC) to the tune of $20B. Not only does the bank receive the bailout, but BAC will also get a guarantee of upwards of $100B for potential losses that Merrill Lynch & Co. was carrying on their books when BAC acquired them last year.

The current loan with guarantee nearly $118B in bad loans and other securities back by residential and commercial real estate loans incurred by Merrill Lynch before the company went bankrupt. Before today’s loan extension, BAC had received $25B from the Treasury Department’s TARP fund, the Troubled Asset Relief Program, back in October.

Within the agreement, BAC will consume the first $10B in losses from Merrill Lynch, while the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) will take the next $10B in losses from the merger. Following that, the Treasury will take on 90% of the remaining losses, while BAC will take the 10% left over in losses.

In agreement with the new arrangement, the government will now receive $24B worth of preferred stock from Bank of America that will pay an annual interest rate of 8%.

Although the bank did not officially release a statement on today’s events regarding additional rescue funds, analysts believed that the company would report a loss for the 4th quarter. In fact, the nation’s largest bank, in terms of total assets, did exactly that this morning.

Before the markets started trading, the company affirmed reports that for the 4th quarter, BAC recorded a loss of $2.39B, or $0.48 per share, versus a profit of $215M, or $0.05 per share from a year ago. Current market and financial conditions have weighed heavily on the company’s performance over the last year, especially with worsening credit, bad investments and huge write-downs.

Quarterly revenue, however, increased to $15.98B, up 19% from last year’s tally of $13.45B. During the quarter, the bank set aside some $8.54B for bad loans, more than two-and-a-half times that amount from the previous year of $3.31B. BAC also released full-year totals, which saw net earnings of $2.56B, or $0.55 per share, compared to a profit of $14.8B, or $3.30 per share from 2007.

As for the company that BAC acquired, Merrill Lynch. They posted a quarterly loss of $15.31B, or $9.62 per share, proving to the government the need for additional capital in order to absorb the massive losses incurred by Merrill Lynch’s bad mortgage debts.

In response to the company’s earnings release earlier this morning, CEO Ken Lewis remarked, "Last quarter we said that market turbulence, economic uncertainty, and rising unemployment would take its toll on quarterly earnings, and that has certainly been the result for the fourth quarter." Lewis went on to add that "Congress has passed a financial stabilization plan as well as other programs put in place, starting to stabilize the market and promote liquidity, but at a pace slower than any of us would like."

At the time of posting, shares of Bank of America plummeted more than 11%, giving up $0.97 to trade at $7.35 per share. With today’s trading price, it marks the lowest level reached in more than 17 years. In addition, over the past year, the price for BAC stock has plummeted more than 84%, and since the start of 2009, shares have fallen nearly 50% in value.

For more information on the stock and options markets check out the wealth of information at BetterTrades.