Page 414 - untitled

CRISIS AND PANIC 

In addition to those TARP investments, at the end of  Bank of America and
Merrill Lynch had borrowed  billion under the Fed’s collateralized programs (
billion through the Term Auction Facility and  billion through the PDCF and
TSLF) and  billion under the Fed’s Commercial Paper Funding Facility. (During
the previous fall, Bank of America’s legacy securities arm had borrowed as much as
 billion under TSLF and as much as  billion under PDCF.) Also at the end of
, the bank had issued . billion in senior debt guaranteed by the FDIC under
the debt guarantee program.  And it had borrowed  billion from the Federal
Home Loan Banks. Yet despite Bank of America’s recourse to these many supports, the
regulators worried that it would experience liquidity problems if the fourth-quarter
earnings were weak. 
The regulators wanted to be ready to announce the details of government sup-
port in conjunction with Bank of America’s disclosure of its fourth-quarter per-
formance. They had been working on the details of that assistance since late
December,  and had reason to be cautious: for example,  of Bank of America’s
repo and securities-lending funding, a total of  billion, was rolled over every
night, and Merrill “legacy” businesses also funded  billion overnight. A one-
notch downgrade in the new Bank of America’s credit rating would contractually
obligate the posting of  billion in additional collateral; a two-notch downgrade
would require another  billion. Although the company remained adequately capi-
talized from a regulatory standpoint, its tangible common equity was low and, given
the stressed market conditions, was likely to fall under .  Low levels of tangible
common equity—the most basic measure of capital—worried the market, which
seemed to think that in the midst of the crisis, regulatory measures of capital were
not informative.
On January , the Federal Reserve and the FDIC, after “intense” discussions,
agreed on the terms:  Treasury would use TARP funds to purchase  billion of
Bank of America preferred stock with an  dividend. The bank and the three perti-
nent government agencies—Treasury, the Fed, and the FDIC—designated an asset
pool of  billion, primarily from the former Merrill Lynch portfolio, whose losses
the four entities would share. The pool was analogous to Citigroup’s ring fence. In
this case, Bank of America would be responsible for the first  billion in losses on
the pool, and the government would cover  of any additional losses. Should the
government losses materialize, Treasury would cover , up to a limit of . bil-
lion, and the FDIC , up to a limit of . billion. Ninety percent of any additional
losses would be covered by the Fed. 
The FDIC Board had a conference call at  P.M. on Thursday, January , and
voted for the fourth time, unanimously, to approve a systemic risk exception under
FDICIA. 
The next morning, January , Bank of America disclosed that Merrill Lynch had
recorded a . billion net loss on real estate-related write-downs and charges. It
also announced the  billion TARP capital investment and  billion ring fence
that the government had provided. Despite the government’s support, Bank of Amer-
ica’s stock closed down almost  from the day before.