Bank of America (NYSE: BAC) posted 2008 net income of $4 billion, down from $15 billion in 2007. Its fourth quarter revenue was up 19% to $15.98 billion from $13.45 billion in 2007. But last fall Bank of America agreed to acquire Merrill Lynch -- which had a fourth-quarter net loss of $15.31 billion. And as an apparent condition of closing the Merrill deal, Bank of America has demanded and received about $120 billion from the government ($20 billion + the part of the $118 billion absorbed by the government).
The terms of Bank of America's deal mean the government will inject an additional $20 billion into Bank of America -- raising its holdings to $45 billion and making its 6% stake the single largest one. The government will also guarantee part of a pool of $118 billion in illiquid assets, including residential and commercial real estate and corporate loans. Bank of America will be responsible for the first $10 billion in losses; the Treasury and the FDIC will take on the next $10 billion in losses. The Fed will absorb 90% of any additional losses, with Bank of America responsible for the rest.
So we the taxpayers now own Bank of America because its CEO Ken Lewis had to have Merrill Lynch. As I posted last night, this does not appear right to me. Why should taxpayers pay for Lewis's failure to conduct rigorous due diligence before agreeing to buy Merrill? The numbers clearly show that without Merrill, Bank of America would be in relatively good shape, but with it, Bank of America is a financial basket case.
As taxpayers, we have Ken Lewis and Stan O'Neal, former Merrill CEO, to thank for this. But let's not forget our government that decided to let bankers get millions in bonuses in good times while making taxpayers foot the bill for their losses in bad ones.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. Portfolio published his eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing on December 26, 2008. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
1-16-2009 @ 10:49AM
joecola said...
Can anybody say "Tax Revolt"?!?
1-16-2009 @ 1:27PM
MSgt2475 said...
Now this is utmostly rediculous, for the taxpayers to bailout another big bank and not have them show where the money is going. The people who need the money(homeowners, people facing loss of their cars and homes, etc) are not getting it. Congress needs to be more careful with how these funds are being used, not just for fun and games and big bonuses for execs.
1-16-2009 @ 10:00PM
hfg said...
Lewis is just like Ken Thompson of Wachovia, they are screwing up, because of their PERSONAL EGOS, 2 perfectly fine banks.
Pamma
1-17-2009 @ 1:14AM
Ray said...
wake up people do you really believe that these business leaders can't see this coming? It is just drama. They have to save the elites because they are a lot smarter than average joes and we will need them to turn things around. If you give money to average joes they don't know what to do with that money other than paying bills... they are not good at using money to create more values.