Financial behemoth Bank of America is set to receive a massive $140bn state lifeline, as President-elect Obama prepares to spend more than $1trn on getting the US out of recession. The BoA rescue, which includes $20bn in cash plus $118bn of guarantees for a pool of its dodgiest assets, comes just after the bank completed its acquisition of Merrill Lynch – rather suggesting that the management may not have done its sums properly (or that they were misled, as they're now claiming). But although it leaves the BoA board rather red-faced, at least it shows that the US government is prepared to do whatever it takes to keep the banking sector afloat...
The BoA bail-out money is coming from Hank Paulson’s TARP pot, after President-elect Obama was given the all-clear by the Senate to spend the remaining $350bn of the controversial $700bn fund (although only after managing to put down a Republican rebellion, by promising to spend a substantial chunk on tackling the mortgage crisis). BoA was actually seen as one of the stronger banks, as evidenced by the Merrill deal – but after its share price dipped 18% yesterday (along with most of the other banks, to be fair), the US government was forced to step in and bolster its capital position. It’ll be taking a stake in the bank in return.
And the spending won’t stop there: the majority Democrats in the House of Representatives have just unveiled plans for a further $825bn ‘American Recovery and Reinvestment Plan’, developed in conjunction with the incoming President – a hugely expensive package of stimulus measures for the economy. Consisting of $550bn in emergency spending (which will be used to build roads, bridges, and schools, and provide healthcare benefits to low-income families) plus another $275bn in temporary tax benefits, this will mean Obama has a war-chest of $1.175trn to fight the recession. It’s an almost unimaginable sum, and could double the US national debt (which is already at record levels).
The obvious question for us Brits is whether our Government will soon be forced to follow suit. Share prices in the banking sector have been hammered this week, and there are continued whispers about the possibility of a ‘bad bank’, in which the other banks could dump all their dodgy assets (and thus improve the state of their balance sheets). A BoA-style asset guarantee scheme is also a possible model. Over in Ireland today, the government announced that it will nationalise Anglo Irish Bank, after deciding that another cash injection wouldn’t cut the mustard – the Treasury will be desperate to avoid RBS or Lloyds suffering the same fate.
Meanwhile we notice that 20 of the passengers on the plane that miraculously survived a crash into the Hudson River yesterday were Bank of America employees on their way to a meeting. So they’ve been bailed out twice in one day...
In today's bulletin:
US doubles up with $140bn Bank of America bailout
Fears fuelled as Honda culls 3,000 jobs
Cooper 'sorry' for Equitable Life
MT's Week in 60 Seconds
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