19 Jan 2009, David Benyon, Operational Risk & Regulation
WASHINGTON, DC - The US government has agreed to provide a package of loan guarantees, liquidity access and a capital top up to Bank of America. The US Treasury and Federal Deposit Insurance Corporation (FDIC) will protect $118 billion of debt held by the ailing bank in the form of loans, securities backed by residential and commercial real estate loans, and other such assets, all marked to current market value.
The majority of these assets were assumed by Bank of America after its takeover of Merrill Lynch announced in September. Preferred shares will be issued to the Treasury and FDIC, and the assets will remain on the bank's balance sheet. The Federal Reserve agrees under the scheme to guarantee residual risk in the assets through a non-recourse loan.
The Treasury will also invest $20 billion through its Troubled Asset Relief Program (Tarp) in exchange for preferred stock offered with an 8% dividend. As a condition, Bank of America must comply with executive pay limitations set out by the Treasury and modify its mortgage loan lending strategy.
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