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Document Type

Case Study

Case Series

Ad hoc Emergency Liquidity Programs

Abstract

On December 31, 2008, Bank of America (BofA) finalized its acquisition of Merrill Lynch, absorbing losses of $15.5 billion as a result. Regulators were concerned about BofA’s short-term liquidity position and ability to post more collateral if its credit rating was downgraded. On January 16, 2009, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Department of the Treasury announced an interagency support package to BofA, which included an asset guarantee wherein all three agencies shared losses with BofA on a “ring-fenced” $118 billion pool of assets. Under the ring-fencing arrangement, known as the Asset Guarantee Program (AGP), BofA would absorb the first $10 billion in losses on the asset pool; the Treasury and FDIC provided $10 billion in loss protection after that, with BofA absorbing a further $1.1 billion. If losses exceeded $21.1 billion, the Fed agreed to provide a loan to BofA for 90% of the amount of those losses. The Fed considered the facility an emergency loan and would charge a penalty rate. The Fed’s participation was essential to the AGP because it was the only agency that could provide a nonrecourse loan large enough to cover the entire asset pool. This message mattered to the market at the time—it signaled that the government wasn’t going to allow the systemic bank to fail. However, based on a stress test analysis of the portfolio by a third-party vendor, the Fed didn’t expect it would ever have to extend credit under the facility. BofA and the authorities never signed definitive documentation for the arrangement, and BofA never availed itself of the Fed’s loan facility or any other component of the AGP. Throughout numerous negotiations, the parties eventually reduced the size of the covered asset pool to $83 billion. The bank publicly announced on May 7 that it had ended negotiations for the AGP and later agreed to pay a termination fee of $425 million to the Treasury, Fed, and FDIC, of which the Fed received $57 million for its lending commitment and operational costs.

Date Revised

2025-04-15

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