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The $45 Billion Dollar Club

Posted By Barry Ritholtz On January 16, 2009 @ 7:20 am In Bailouts,Corporate Management,M&A,Taxes and Policy | Comments Disabled

The United States of Wall Street just added another major holding to its portfolio of financial garbage: Bank of America.

Like Citi, BA has now received more MORE IN BAILOUT MONEY than its actually worth. (BAC = $53B; C = $21B) How this can ever be a profitable investment, as some mathematically challenged Congress-critters have suggested, is all but impossible to imagine.

Blaming “previously undisclosed losses from its Merrill Lynch,” B of A threatened to kill their purchase of Mother Merrill.  Treasury made an emergency capital injection of $20 billion, on top of the $15B and $10B already received by BA and MER respectively. The taxpayers will also backstop $118 billion of assets, setting up what is likely to be a jumbo money losing trade.

What should have happened in both instances was an orderly liquidation, selling off the pieces to competent managers who understand risk, and can manage smaller portions of the firm. Instead, the same idiots who helped destroy all of companies involved are still running the show.

Federal Reserve:

“The U.S. government entered into an agreement today with Bank of America to provide a package of guarantees, liquidity access, and capital as part of its commitment to support financial market stability.

Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value. The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch. The assets will remain on Bank of America’s balance sheet. As a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Bank of America from the Troubled Asset Relief Program in exchange for preferred stock with an 8 percent dividend to the Treasury. Bank of America will comply with enhanced executive compensation restrictions and implement a mortgage loan modification program.”

The amazingly bad deal Bank of America plan mirrors an even worse bad deal made by the Feds with Citigroup in November. There, the taxpayers explicitly insured the bank against losses on 90% of $306 billion of toxic assets — Citigroup’s real-estate loans and securities.

Like Citi, the B of A monies are a terrible deal for the taxpayer — not a lot of bang for the buck, and leaving the same people who created the mess in charge.

Organ transplant medicine understands certain truths: You do not give a healthy liver to a raging alcoholic, as they will only destroy the organ via their disease/bad judgment/lifestyle.

Why do we give billions of taxpayer dollars to incompetent managers who failed to protect their assets, who destroyed shareholder value? These people have demonstrated a marked INABILITY to run these firms. Why reward them with 10s of billions of dollars?

Its nothing short of madness . . .

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Sources:
Treasury, Federal Reserve, and the FDIC Provide Assistance to Bank of America [1]
Federal Reserve, January 16, 2009

http://www.federalreserve.gov/newsevents/press/bcreg/20090116a.htm

Bank of America Posts Quarterly Loss After Bailout [2]
David Mildenberg and Linda Shen
Bloomberg, Jan. 16 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJx0WNKsL9Fk&

BofA’s Latest Hit
Treasury Injects $20 Billion More; Stock at 1991 Level [3]
WSJ, JANUARY 17, 2009

http://online.wsj.com/article/SB123208718376389675.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2009/01/the-45-billion-dollar-club/

URLs in this post:

[1] Treasury, Federal Reserve, and the FDIC Provide Assistance to Bank of America: http://www.federalreserve.gov/newsevents/press/bcreg/20090116a.htm

[2] Bank of America Posts Quarterly Loss After Bailout: http://www.bloomberg.com/apps/news?pid=20601087&sid=aJx0WNKsL9Fk&

[3] Treasury Injects $20 Billion More; Stock at 1991 Level: http://online.wsj.com/article/SB123208718376389675.html

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