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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

On September 15, 2008, Bank of America (BofA) announced a merger with the investment bank Merrill Lynch. In December, BofA learned that Merrill Lynch had experienced large, unexpected losses amounting to $15.5 billion during the fourth quarter of 2008. In light of these losses, BofA’s CEO informed the US Treasury secretary and Federal Reserve chairman that BofA intended to invoke the material adverse change clause of the merger agreement, allowing for a renegotiation of, or escape from, the merger. Officials at the Fed and Treasury warned BofA that a failure of the merger would have adverse consequences for BofA and the broader financial system. BofA ultimately went through with the merger, which closed on January 1, 2009. At the same time, BofA requested government assistance to shore up its financial position and mitigate market distortions following the merger. On January 16, 2009, BofA announced fourth-quarter earnings, making public Merrill Lynch’s losses. On the same day, the Treasury, Fed, and the Federal Deposit Insurance Corporation (FDIC) announced a package of ad hoc assistance for BofA. This included a $20 billion capital injection provided by the Treasury, under a recently announced program, the Targeted Investment Program (TIP), and a $118 billion loss-sharing agreement through the Asset Guarantee Program (AGP), covered by the FDIC, Fed, and Treasury. Under the guarantee, BofA would absorb the first $10 billion in losses; the FDIC, Treasury, and BofA agreed to share losses on the next $11.1 billion, with the Fed agreeing to provide a nonrecourse loan to BofA for 90% of additional losses. Through the TIP, the Treasury purchased BofA’s newly issued senior preferred shares, carrying an 8% dividend. In exchange, the Treasury also received $2 billion in warrants to purchase BofA’s common stock at $13.30 per share. On December 9, 2009, BofA repurchased all Treasury investments in BofA made through the Troubled Assets Relief Program (inclusive of AGP, TIP, and the earlier Capital Purchase Program). On March 3, 2010, the Treas

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