The U.S. government has entered into an agreement with Bank of America to provide a package of guarantees, liquidity access and capital worth $138 billion as part of its commitment to support financial market stability.
The U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value.
The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch. The assets will remain on Bank of America’s balance sheet. As a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC.
In addition, the Treasury will invest $20 billion in Bank of America from the troubled assets relief programme in exchange for preferred stock with an 8% dividend to the Treasury. The Treasury exercised this funding authority under the Emergency Economic Stabilization Act’s troubled assets relief programme.
The U.S. Treasury recently created the troubled assets relief programme to encourage qualifying U.S. financial institutions to increase the flow of financing to businesses and consumers, thereby restoring liquidity and stability to the U.S. financial system. Companies participating in the programme must adopt the Treasury Department’s standards.
