The approximately $120 billion aid package on Thursday for Bank of America — including injections of capital and absorbed losses — as well as a $300 billion package in November for Citigroup both represented displays of financial gymnastics aimed at providing capital without appearing to take commanding equity stakes.
– “Rescue of Banks Hints at Nationalization”, The New York Times, B1, January 16
This morning the government announced a Citigroup style guarantee of $118 billion of Bank Of America’s toxic assets. For a fee of $4 billion in preferred shares, plus $400 million in warrants, the government will guarantee losses on the $118 billion toxic asset pool after the first $10 billion. In addition, the Treasury will invest another $20 billion from the TARP into B of A in the form of more preferred shares (Treasury Press Release).
This is a great deal for B of A shareholders because for a fee of $4 billion, they are maximizing their losses on this toxic pool of assets at $14 billion – $104 billion in potential losses will now be absorbed by the government. When the government did this deal for Citi, it marked a short term bottom in the stock and a great trading opportunity.
From the standpoint of politics, this is getting dicey as a heavily read article in today’s NY Times suggests: “Rescue of Banks Hints at Nationalization”. The government has tons of preferred stock in these banks and in the case of Citi and B of A it is now backstopping huge pools of toxic assets. The taxpayer is essentially on the hook for a lot of the future action, especially in these two banks.
Disclosure: Top Gun has no position in Citigroup (C) or Bank of America (BAC).