Escalating credit costs forced Bank of America Corp. to report a $2.39 billion fourth-quarter loss, hours after it convinced the federal government it needed a multibillion-dollar lifeline to survive the absorption of Merrill Lynch’s hefty losses.
After a marathon negotiating session, the Bush administration agreed early Friday to give Bank of America an additional $20 billion worth of fresh capital to help it stomach losses at Merrill Lynch & Co, which the company acquired Jan. 1. The funds are in addition to $25 billion in TARP rescue funds Bank of America has already received.
The new infusion means Bank of America has now taken $45 billion of government aid, the same amount as Citigroup Inc. In connection with the package, Bank of America slashed its quarterly dividend to a mere penny from 32 cents, agreed to further limit executive pay and and work more intensively to modify the mortgages of distressed homeowners.
The government’s agreement with Bank of America mentions “enhanced executive compensation restrictions” but doesn’t elaborate. However, Rep. Barney Frank, D-Mass., who heads the House Financial Services Committee, last week issued an outline of his proposal to attach strings to spending the rest of the bailout money. It would slap strict limits on executive compensation — both for companies receiving new federal money and those that already have — including a ban on any bonuses for the 25 highest paid executives.
Lawrence H. Summers, a top aide to Obama, sent a letter to House and Senate leaders Thursday detailing plans for the remaining $350 billion in bailout funds, including a requirement that “executive compensation above a specified threshold amount be paid in restricted stock or similar form that cannot be liquidated or sold until the government has been repaid.”
For the fourth quarter of 2008, Charlotte-based BofA posted a loss after paying preferred dividends of $2.39 billion, or 48 cents per share, down sharply from a profit of $215 million, or 5 cents per share, a year ago. BofA cited rising credit costs, significant writedowns and trading losses in its capital markets businesses amid the deepening economic recession.
Merrill Lynch posted a loss of $15.31 billion, or $9.62 per share, for the period — underscoring Bank of America’s assertion that it needed extra U.S. aid in order to absorb the investment bank’s bad mortgage bets.
“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,” Chief Executive Ken Lewis said during a conference call with investors.
“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,” he added.
Quarterly revenue after interest expense rose 19 percent to $15.98 billion from $13.45 billion a year earlier. Net interest income, or the money banks make on loans minus what it pays out in interest on personal bank accounts, rose 37 percent to $13.41 billion from $9.82 billion. The increase was fueled by higher market-based income, the favorable rate environment, loan growth and the acquisition of Countrywide.
But noninterest income, or the cash banks make from mortgage loan servicing fees and other fees and charges, declined 29 percent to $2.57 billion. Sales and trading losses in BofA’s capital markets and advisory services segments more than offset higher mortgage banking income, and gains on sales of debt securities.
Under terms of the latest agreement, the Federal Reserve and Federal Deposit Insurance Corp. also agreed to protect BofA against further losses on $118 billion in capital markets exposure, mainly linked to Merrill Lynch. BofA will cover the first $10 billion in losses and the government will cover 90 percent of any subsequent losses. As compensation for the new support, the government will get $24 billion in preferred stock which will pay an annual interest rate of 8 percent.
In total, the government has put about $163 billion at Bank of America’s disposal.
Bank of America said the rescue package will help it operate as normally as possible. The company said it extended more than $115 billion of new loans during the fourth quarter and added mortgage staff to accommodate increased refinancings and loan modifications.
Even so, the bank has its hands full with soaring credit losses.
Bank of America set aside $8.54 billion for bad loans in the fourth quarter, up from $3.31 billion a year earlier. Net charge-offs, or loans written off as unpaid, nearly tripled from a year earlier to $5.54 billion, or 2.36 percent of average loans and leases.
For the full year, earnings after preferred dividends totaled $2.56 billion, or 55 cents per share, down from $14.80 billion, or $3.30 per share, in fiscal 2007.