Bank Of America Is The New Citigroup


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).

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