WASHINGTON/NEW YORK (Reuters) – Bank of America, the largest U.S. bank, is close to getting billions of dollars more in federal support from taxpayers, a person familiar with the matter said on Wednesday.
As Congress debated the future of the government’s $700-billion financial markets rescue program, the source said that Bank of America has struggled to digest its January 1 buyout of former Wall Street brokerage giant Merrill Lynch & Co.
Merrill’s fourth quarter losses exceeded expectations and spurred Bank of America in mid-December to start talking to the U.S. Treasury Department, which is managing the bailout.
U.S. Treasury Secretary Henry Paulson was driving the talks out of concern that Bank of America might be unable to complete the buyout, cutting Merrill adrift, the Wall Street Journal reported earlier on Wednesday.
The size and terms of any aid that could result are still being finalized, with details expected to be announced with Bank of America’s fourth-quarter earnings, due out January 20.
In after-hours trading, Bank of America’s shares dropped more than 5 percent to the lowest level since 1991. During Wednesday’s trading session, Bank of America’s shares dropped 4.2 percent to $10.20, down 28 percent so far this year.
Bank of America declined to comment. The White House declined to comment on the original report in the Wall Street Journal, as did a U.S. Treasury spokeswoman.
NEW URGENCY FOR TARP
The news came as President-elect Barack Obama pressured Congress to release a second installment of $350 billion for the bailout program known as the Troubled Asset Relief Program, or TARP. It was first approved in October.
Treasury has already committed $350 billion under the TARP, largely to shore up the balance sheets of large banks, but critics say the banking industry remains in desperate straits.
“The first round of TARP didn’t give (Bank of America) the ability to build tangible equity, as well as fund Merrill Lynch, as well as handle loan losses and get rid of the problems on their balance sheets,” said Christopher Marinac, an analyst at FIG Partners in Atlanta, Ga.
“The reality is that they need more common equity — TARP may not be enough.”
Bank of America and Merrill Lynch together received $25 billion from the TARP in October.
On Thursday, the U.S. House is expected to vote on a bill that would impose stricter terms and conditions on banks that want TARP money. A number of lawmakers who backed the initial TARP funding last year faced voter backlash in the November 4 congressional election.
As of Tuesday, the Treasury Department had paid out $271.7 billion from the initial $350 billion tranche of TARP, leaving a $78.3 billion balance in the bailout fund. All of the money, however, has been earmarked for various uses.
Of the $250 billion allocated to bank capital injections, Treasury had paid out $192.3 billion to 257 institutions, leaving $57.7 billion. The department is now sifting through funding requests from thousands of community banks, which have until February 13 to apply for TARP money.
The ominous news about Bank of America’s need for more help came amid new danger signs for the financial sector.
Citigroup’s share price tumbled below $5 a share on Wednesday, the lowest since a government rescue in November, on growing uncertainty about its future. More bad news may come on Friday, when analysts expect Citigroup to report a fifth straight quarter of multibillion-dollar losses.
Once the world’s largest bank, Citigroup is expected to shrink by about one-third as it sheds unwanted businesses to survive. It has received $45 billion in taxpayer funds from the TARP, including $20 billion in November to avoid a collapse.
Merrill CEO John Thain negotiated the sale of the brokerage and investment bank, which had been rocked by billions of dollars in toxic assets, to Bank of America in mid-September.
It occurred on the same weekend that rival Lehman Brothers Holdings Inc filed for bankruptcy protection.
Some analysts saw the deal as a coup for Bank of America CEO Kenneth Lewis, who also used the bank’s relative strength to buy Countrywide Financial, formerly the nation’s largest mortgage lender, but the bank’s stock has since slumped.
By Kevin Drawbaugh and Dan Wilchins
(Additional reporting by Jonathan Stempel in New York, and Matt Spetalnick and David Lawder in Washington; Editing by Bernard Orr)