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Government Foolishness (BoA)




Morgan Hosel yesterday brought to our attention the BoA vs taxpayer fiasco (see below).  I understand Bank of America benefited from implied government insurance, but never signed the paperwork.   And I understand the government (or customer) should benefit from taking the risk. However, if BoA didn’t sign the paperwork, that is the foolishness of the government, and the government loses.

And the Big G wants to run healthcare?

By Morgan Hosel for Motley Fool

Earlier this year, Bank of America (NYSE: BAC) received an additional slug of capital from taxpayers to digest its Merrill Lynch acquisition. In addition to $20 billion of TARP funds, the bank received what’s called a ring-fenced asset guarantee on 90% of a $118 billion pool of assets.

In layman’s terms, B of A took $118 billion of dodgy assets, stuck them in a separate pile, and asked taxpayers to cover 90% of the losses after the first $10 billion. In exchange, it was to issue Uncle Sam $4 billion in preferred stock yielding 8%, plus warrants worth 10% of that amount. A month earlier, Citigroup (NYSE: C) did a similar thing on a $306 billion pool of assets.

Now here’s where things get weird: The asset guarantee was never used. Consequently, B of A doesn’t want to pay the $4 billion-plus it agreed to compensate taxpayers with. Complicating matters, it claims it doesn’t have to pay simply because it never signed the papers back in January. How convenient.

There’s no question, however, that the deal was struck. B of A’s Jan. 16 press release clearly states that the government was providing “insurance for $118 billion in exposure,” and would “pay a premium of 3.4 percent of those assets for this program.” 

Regulators, feeling used and abused, are fighting for at least a portion of $4 billion as a premium for what’s essentially an insurance policy. This makes sense: There’s no doubt that B of A benefited handsomely from the guarantee, lowering its cost of capital and allaying fears that it was about to explode.

Even if taxpayers never paid out a penny, there’s an argument to make that they accepted a substantial risk, and should be compensated for it. That’s how the business of insurance works.

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