Remember when the feds arranged a hasty sale of Merrill Lynch to Bank of America in order to avoid its collapse? Now they’ve had to rescue BofA too, with $20 billion in TARP funds and a 12-digit pledge to cover their assets to keep depositors from making a run on the bank. Of course, they’re Too Big To FailTM — or at least they are now:
With a new round of turmoil gripping the financial markets, the Bush administration late Thursday night rushed $20 billion in emergency funding for Bank of America.
Just months ago, Bank of America, based in Charlotte, N.C., appeared to emerge as the nation’s top bank after it stepped in on Sept. 15 to purchase investment bank Merrill Lynch. After Merrill’s fourth-quarter results proved worse than expected, however, the acquisition was in peril and investors have fled Bank of America in droves.
Bank of America’s stock lost 40 percent of its value during the past 10 days — shares closed on Thursday in single digits for the first time in 18 years — and the taxpayer money will be used to ameliorate the losses from its acquisition of Merrill Lynch. Chief Executive Ken Lewis called it “deal of a lifetime” when it was announced.
People familiar with the unfolding events, requesting anonymity to speak freely, said Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, with the knowledge of President-elect Barack Obama’s transition team, pressured the bank to stick to its purchase of Merrill Lynch.
Uh-huh. In other words, had Paulson not forced the bank to buy up a failing business with a horrible balance sheet, BofA would have been stable and we wouldn’t be spending $20 billion to stabilize it. “Deal of a lifetime,” indeed. Everyone involved in that transaction should be fired, starting with Paulson and Bernanke, except of course that Paulson’s out of a job on Tuesday, anyway. BofA already received $25 billion in bailout money when they bought ML last year, and now they’ll get another $20 billion while they shed 35,000 jobs. What a deal for taxpayers, right?
But wait — there’s more! Since BofA apparently called Operator #5 before midnight, they get the extra bonus of what amounts to a $118 billion line of credit to help backstop their assets, primarily real-estate loans, so that investors can feel secure despite their drop in value. Where did they get those loans? They bought them when they bought Merrill Lynch. I wonder if they get a set of Sham-Wows with that …
Of course, had Paulson actually followed the plan that he begged Congress to pass last October, the TARP funds would have gone to purchasing those toxic mortgage-backed securities and would have stabilized the real-estate loan market. It might have made the entire series of bailouts unnecessary. Now it looks like Paulson will wind up doing both TARP and the bailouts but backwards, and while almost destroying other financial institutions along the way.
This is government doing what it does naturally to markets — they screw them up. One would have thought they’d have learned this lesson from the housing bubble. Instead, we’re going to get a steady dose of the hair of the dog for the next four years, and we can expect more nonexistent money to chase after bad results.