BofA Seeks Feds Help With Merrill Acquisition

According to the WSJ, Bank of America, is now next in line to get more government aid. Apparently, talks have been going on with the Fed and Treasury since mid-December when BofA informed them that given the size of potential losses from its acquisition of Merrill Lynch that it might not be able to complete the acquisition. That got their attention!

Treasury, concerned the deal’s failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte, N.C. lender on the “formulation of a plan” that includes new government capital. The terms are still being finalized, this person said, and details are expected to be announced with Bank of America’s fourth-quarter earnings, due out Jan. 20.

Any possible arrangement might protect Bank of America from losses on Merrill’s bad assets. There would be a cap on the amount of losses the bank would have to absorb with the federal government being on the hook for the remainder, according to one person familiar with the matter.

The possible deal is further evidence of the banking system’s delicate condition and its hunger for more capital, despite billions of dollars already invested in financial institutions by the federal government. Thus far, Bank of America has received $25 billion in federal rescue aid, including $10 billion Merrill Lynch would have received if the sale to Bank of America had not closed.

I hope there is something in this one for the taxpayer. We will have to wait and see the actual structure of the deal, but if BofA does get the feds to pick up some of the losses then the whole deal might eventually turn out to be really sweet for the bank.

I wrote yesterday that we should just nationalize Citi, sort through the whole mess and sell off whatever that was saleable. I thought afterwards that I had been too rash and even considered taking the post down. I didn’t and feel a little better right now. Clearly, we are getting nowhere in terms of sorting all of this out. From start to finish either the government and the banks have deceived the public about the scope of the problem or they are too incompetent to arrive at some sort of realistic assessment. What started out as a manageable $50 billion problem according to Chairman Bernanke has now turned into a pit with seemingly no discernible bottom. It’s time for a different approach.

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