Friday, January 16, 2009

Fed to Backstop Bank of America Losses

More trouble for another big bank. First Citigroup is breaking up, which appears necessary. Now Bank of America can't hold together their purchase of Merrill.

The government said earlier today it will invest $20 billion in Bank of America and guarantee $118 billion of assets to help the company absorb Merrill and prevent the financial crisis from deepening.

The agreement is part of a commitment to “support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington.

About three-quarters of the federal aid is intended to cushion Merrill’s losses, with the rest for Bank of America, Chief Financial Officer Joe Price told investors during today’s conference call.

This is not a surprise. If we remember that crazy weekend when Lehman went under, and all the investment banks were on the verge of following, we'll know why this is happening. The government was under the gun, and they really didn't want to lose another bank. So Bank of America stepped up and agreed to buy Merrill. I can guarantee it was one of those deals where the government basically said, "if you do this deal, we'll do whatever is necessary to help you make it work." So, now that they need help, its no surprise they are getting it. Just like when no one could figure out why Warren Buffett got great terms on his deal with Goldman Sachs. Same deal. They guaranteed that they wouldn't let Goldman fail. Bottom line here is that when capital is very scarce, if you've got it, you can get terms which protect against failure.

We're continuing the pattern of privatizing gains, and socializing losses. Its horrible for taxpayers, but once we've committed to this path, its hard to get off it. I anticiapate more of this happening in the future.

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