- The Washington Times - Friday, January 16, 2009

UPDATED:

The Treasury Department early Friday morning gave Bank of America a third cash infusion of $20 billion to stave off a collapse from deepening losses on souring loans.

Only a few hours after the Bank of America action, the Treasury announced it is giving Chrysler’s financial arm a $1.5 billion loan to enable the company to keep providing auto loans. Both actions were possible because of the Senate’s move to allow release of a second, $350 billion installment of the financial bailout fund on Thursday.

The giant Charlotte, N.C., bank, the nation’s second largest, was one of the first to receive Treasury’s initial round of bank aid of $15 billion in the fall, and it got another $10 billion last week after it took over the former Wall Street brokerage Merrill Lynch.

Treasury is receiving stock warrants in the bank and an 8 percent dividend in exchange for the cash. In addition, the Federal Deposit Insurance Corp. and Federal Reserve are providing a guarantee against “unusually large losses” on $118 billion of toxic loans the bank acquired in its takeover of Merrill. It is those loans that have led to the recent troubles that sent the bank’s stock price plunging.

The assistance for Bank of America is modeled on the Treasury’s rescue plan of Citigroup in November. The department has set up a program to rescue ailing banks that it deems too big to fail. Only a handful of other big-name banks are eligible for such extensive assistance.

In announcing the package of aid for Bank of America, the FDIC also said is widening its program for guaranteeing the bonds of national banks and will back bonds with maturities up to 10 years if the debt is backed by collateral and is used to support consumer lending. Previously, the agency guaranteed only debt maturing in 3 years or less.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in announcing the measures.

Jeffrey Goldfarb, analyst with Breakingviews.com, said the latest government aid package does not seem generous enough to compensate Bank of America for taking the risky step of rescuing Merrill Lynch on the same weekend in September that Lehman Brothers collapsed and went into bankruptcy for lack of buyers.

“If the authorities encouraged BofA in its rescue takeover of Merrill Lynch, which lost a staggering $15 billion in the fourth quarter, then this lifeline seems small thanks,” he said.

The Treasury loan to Chrysler Financial comes under a program the department set up last month to bail out automakers and will be secured by auto loans made by the Chrysler arm. Treasury also will receive stock warrants from the company.

Both Chrysler and Bank of America will have to restrict executive compensation and limit dividends in exchange for receiving the Treasury aid — a condition imposed on all beneficiaries of the bailout funds.