United States: Bank of America Capital Injection, 2009

As of September 30, 2008, BofA was the largest banking organization in the United States. Its primary bank subsidiary, Bank of America, N.A., was the second-largest bank in the country. BANA held more than 10% of American bank deposits, had total consolidated assets of $1.4 trillion (the larger combined banking organization held $2.7 trillion), and was the largest holder of insured deposits (Fed 2009a; FDIC 2017). BofA was a major supplier of credit to the US economy and, following its merger with Merrill Lynch, was the largest securities broker in the world (Fed 2009a). The combined BofA organization had $426.3 billion of debt outstanding in commercial paper, other short-term debt, and long-term debt (BofA 2009b). According to the Fed, BofA was a significant player in three of five critical markets (wholesale payments, foreign exchange, and US government and agency securities) while Merrill Lynch was a significant player in a fourth (corporate and municipal securities); together, their failure would have caused major disruptions in payment and settlement systems, both domestically and abroad (Fed 2009c).

According to the Treasury, the purpose of TIP was to foster financial stability, strengthen the economy, and protect jobs by preventing the loss of confidence in a financial institution and the resulting destabilizing market disruptions (Treasury 2009b).

With respect to eligibility, the Congressional Oversight Panel noted that although the CPP had been a voluntary program for healthy banks, the TIP (and the Systemically Significant Financial Institutions [SSFI] Program) addressed institutions “experiencing more difficulty or at risk of failure” in connection to other government programs (COP 2009a). The Treasury would select TIP participants on a “case-by-case basis” and would consider various eligibility criteria including: a bank’s interconnectedness, systemic importance, access to other sources of private or government assistance, size of potential risk for a loss of confidence in relation to illiquid or distressed assets, and whether other institutions with similar vulnerabilities might be affected by a bank’s participation in the program (Treasury 2009b).

On September 15, 2008, BofA announced a plan to acquire Merrill Lynch, approved by BofA shareholders on December 5, 2008. On December 12, BofA’s CEO at that time, Kenneth Lewis, discovered a $12 billion loss at Merrill Lynch and subsequently informed then–US Treasury Secretary Hank Paulson that BofA was considering invoking the MAC clause to pull out of the deal (House Oversight Committee 2009a). On December 17, Lewis spoke with the Fed and Treasury to discuss government assistance through capital injections and various ways to fill the hole emanating from Merrill Lynch’s losses (House Oversight Committee 2009a). On December 21, Lewis decided to go through with the merger, which closed on January 1, 2009 (SIGTARP 2009).

On December 22, Fed officials and Lewis discussed potential options for government assistance, agreeing that TARP capital in the form of common stock “was not an ideal solution, given the ownership implications” but agreed to consider alternatives including a government backstop of a capital raise and government “common with limited control rights” (Fed 2009b, 18).^FNBofA’s management wanted to prevent the dilution of interests of existing shareholders (BofA 2008). Federal regulators and Lewis discussed two potential transactions: (a) a government capital injection with a wrap (guarantee) on certain assets and (b) a public capital offering with a ring fence of certain assets. Then–Fed Governor Kevin Warsh also shared the government’s desire for new private capital injections into the banking industry and common stock offerings by BofA in which the government would participate (BofA 2008).

On December 31, 2008, during a special meeting of BofA’s board, Lewis conveyed federal regulators’ position that if BofA were to reject a government capital injection and subsequently return to request an injection, the terms would be “more onerous” to BofA (BofA 2008, 4). Despite preliminary discussions on capital support in December, BofA and Treasury did not finalize the size and structure of government assistance until the first few weeks in January 2009 (House Oversight Committee 2009a).

In response to BofA’s stresses and in order to support broader financial market stability, on January 16, 2009, the Treasury made a $20 billion preferred-share investment into BofA under the Targeted Investment Program, as a part of the broader USG Support Package, which included the Asset Guarantee Program (Fed, FDIC, Treasury 2009; House Oversight Committee 2009b; SIGTARP 2009).

Regulators planned assistance to BofA in advance of its scheduled January 16 earnings call in order to preempt a negative market response (FDIC 2017).

On January 16, 2009, the US government announced an interagency support package to BofA, which, in addition to the TIP capital injections, included the Asset Guarantee Program, wherein the USG agreed to share losses with BofA on a “ring-fenced” $118 billion asset pool. About 75% of the pool was from the former Merrill Lynch portfolio and about 25% was from existing BofA assets (FCIC Report 2011; FDIC 2017; O’Connor, Bush, and Mayo 2009). Under the AGP, BofA would absorb the first $10 billion in losses; the Treasury, FDIC, and BofA agreed to share the next $11.1 billion of losses incurred on that pool of assets. If losses exceeded that amount—roughly 18% across the pool—the Fed agreed to provide a nonrecourse loan to BofA for 90% of the amount of those losses. The Fed considered the facility an emergency liquidity loan and would charge a penalty rate (Fed 2009a). See Arnold (forthcoming) for a separate case study on the Fed’s loan facility with BofA.

In compensation to the government for guaranteeing $7.5 billion (Treasury) and $2.5 billion (FDIC) in losses, BofA would provide (a) $3 billion and $1 billion in preferred stock to Treasury and the FDIC, respectively; and (b) accompanying warrants, as Congress required (Fed 2009a). For BofA, the value of the asset guarantee was that the regulators would have allowed the bank to report significantly higher regulatory capital ratios—which they variously reported would result in $5 billion–$6 billion of additional capital or a 200 basis-point-higher Tier 1 capital ratio (O’Connor, Bush, and Mayo 2009). 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 arrangement (Treasury 2009a; Treasury n.d.a). On September 21, 2009, BofA agreed to pay a termination fee of $92 million to the FDIC, $276 million to Treasury, and $57 million to the Fed for its commitment to lend against the asset pool (Treasury 2009a).

Previously, on October 28, 2008, the Treasury injected BofA with $15 billion in capital using the CPP. The Treasury provided an additional injection of $10 billion on January 9, 2009 (COP 2009b). This was the amount the Treasury pledged to Merrill Lynch in October, with the agreement that Bank of America would receive that amount when it completed its merger with Merrill (SIGTARP 2009).

BofA also made use of numerous Global Financial Crisis–era broad-based lending and guarantee programs. By the end of 2008, BofA had borrowed $60 billion through the Fed’s Term Auction Facility; $28 billion through the Primary Dealer Credit Facility and Term Securities Lending Facility; and $15 billion through the Commercial Paper Funding Facility. It had also issued $31.7 billion in FDIC-guaranteed senior debt under the Temporary Liquidity Guarantee Program. BofA had also borrowed $92 billion from Federal Home Loan Banks (FCIC Report 2011).

The Emergency Economic Stabilization Act (EESA) of 2008 authorized the Treasury to establish the TIP under TARP (SIGTARP 2009). President George W. Bush signed EESA on October 3, 2008, to give the Treasury novel authority to purchase distressed assets related to mortgages, securities, and other financial instruments (Baker Donelson 2008). Section 101(a)(1) of the EESA states that the Treasury was authorized to establish TARP to “purchase, and to make and fund commitments to purchase, troubled assets from any financial institution” (EESA 2008, sec. 101[a][1]). The EESA defines a “troubled asset” as (a) residential or commercial mortgages, or other financial instruments based on or related to mortgages; or (b) any instrument that the Treasury secretary, after consulting with the Fed chair, determines “the purchase of which is necessary to promote financial market stability,” after transmitting that determination to appropriate Congressional committees (EESA 2008, sec. 3[9]). Section 113(d) of the EESA stipulates that, in general, the Treasury—when acquiring troubled assets of a financial institution—must also acquire warrants for the right to receive nonvoting common stock or preferred stock of the financial institution for the benefit of taxpayers (EESA 2008, sec. 111[d][1]). Before the TIP, the CPP was a broad-based program through which Treasury purchased equity in financial institutions; as a TARP facility, the CPP was also authorized under the EESA (Treasury n.d.b).

Section 101(d) of the EESA required Treasury to provide a program description of its TARP program within two business days of the first purchase of troubled assets (EESA 2008, sec. 101[d]). The EESA required that program description to include (a) the mechanism(s) through which Treasury would buy the assets; (b) the pricing/valuation methodology to be employed; (c) the asset manager selection process; and (d) criteria for selecting the troubled assets (EESA 2008, sec. 101[d]).

In exercising its TARP authorities, the Treasury secretary was required by the EESA to consider, inter alia, when purchasing assets or instruments from an individual institution, that institution’s long-term viability; protecting taxpayer money and maximizing returns; and providing systemic financial stability and the stability of the broader economy, to include employment and foreclosures (EESA 2008, sec. 103).

Pursuant to Section 105(a) of EESA, Treasury was required to make monthly disclosures about its use of TARP funds (see Key Design Decision No. 6, Communication and Disclosure) (EESA 2008, sec. 105[a]).

The Treasury ultimately administered the capital injections into BofA, as part of a coordinated effort with the FDIC and Federal Reserve to support BofA’s acquisition of Merrill Lynch (Fed, FDIC, Treasury 2009; SIGTARP 2009). On December 17, 2008, BofA’s CEO at the time, Kenneth Lewis, met with then–Treasury Secretary Henry Paulson and then–Fed Chairman Ben Bernanke to discuss concerns about the planned merger with Merrill Lynch. Merrill Lynch’s losses during the fourth quarter of 2008 had significantly exceed expectations and federal regulators estimated that, post-acquisition, BofA would have the lowest common equity of the large bank holding companies (SIGTARP 2009).

The TIP enabled the Treasury to provide an additional $20 billion in assistance to BofA over the $25 billion limit provided under the CPP since BofA had already received the maximum CPP allocation of $25 billion (SIGTARP 2009).

The Government Accountability Office (GAO) provided oversight of TARP. Congress also created a Special Inspector General for TARP (SIGTARP), which issued audit reports discussing the financial support provided to BofA as part of its broad oversight of TARP programs.

Pursuant to Section 116 of EESA, the GAO provided oversight on the performance of TARP and its related programs (including the TIP) (EESA 2008, sec. 116). The GAO subjected TARP to oversight along the following domains:

• TARP’s performance in meeting the purposes of EESA in foreclosure mitigation, cost reduction, financial stability, and taxpayer protection;
• TARP’s financial condition and internal controls;
• Characteristics of transactions and commitments;
• Characteristics and disposition of acquired assets;
• Efficiency of the use of appropriated funds;
• Legal and regulatory compliance;
• TARP’s efforts in mitigating conflicts of interest;
• Efficiency of contracting procedures. (EESA 2008, sec. 116)

Additionally, the Treasury reimbursed the GAO for oversight costs (EESA 2008, sec. 116). EESA required the Comptroller General, as the head of the GAO, to submit oversight reports every 60 days to Congress and SIGTARP (EESA 2008, sec. 116). EESA also required TARP to issue annual reports of its financial statements, audited by the Comptroller, to Congress and the public (EESA 2008, sec. 116).

The Special Inspector General was appointed by the president and confirmed by the Senate. SIGTARP was responsible for conducting, supervising, and coordinating audits of the purchase, management, and disposition of assets under TARP (EESA 2008, sec. 121). On October 5, 2009, SIGTARP issued a 50-page audit report entitled “Emergency Capital Injections Provided to Support the Viability of Bank of America, Other Major Banks, and the U.S. Financial System,” which covered, inter alia, the basis for the decision to support BofA with the TIP (SIGTARP 2009).

In December 2008, Treasury officials had private discussion with BofA’s management regarding the finalization of the merger with Merrill Lynch and the need for additional government support (SIGTARP 2009). On January 2, 2009, the Treasury announced the creation of the TIP and general eligibility terms for capital injections (Treasury 2009b). On January 16, 2009, the Treasury joined with the Fed and FDIC in announcing the use of TIP for BofA, along with the other support programs (guarantees and liquidity access) (Fed, FDIC, Treasury 2009). BofA simultaneously announced receipt of TIP funds during its fourth-quarter earnings release on January 16, 2009 (O’Connor, Bush, and Mayo 2009).

Pursuant to Section 105(a) of the EESA, Treasury was required to make monthly disclosures to Congress regarding its use of TARP funds (“Monthly 105(a) Reports”), including those used in the TIP (EESA 2008, sec. 105[a]). Starting in October 2008, Treasury has filed Monthly 105(a) Reports each month, through August 2023 at the time of writing.^FNTreasury’s Monthly 105(a) Reports can be found through the Federal Reserve Bank of St. Louis: https://fraser.stlouisfed.org/title/troubled-asset-relief-program-tarp-5167?browse=2000s. Additionally, Section 129 of the EESA required the Fed to report to the Senate Banking Committee and House Financial Services Committee on any use of its Section 13(3) authority within seven days of invoking that authority (EESA 2008, sec. 129[a][2]). In its Sec. 129 Disclosure, the Fed said that the package of measures (including the TIP) that the USG parties agreed to on January 15, 2009, would “help restore confidence in Bank of America and promote financial stability, which is a prerequisite to restoring vigorous economic growth” (Fed 2009a, 3).

The TIP limited dividends to $0.01 per share per quarter for up to three years (COP 2009a).

Preferred Shares

BofA issued Treasury 800,000 fixed-rate cumulative perpetual preferred shares with a liquidation value of $25,000 per share, for a total of $20 billion, and a par value of $0.01 per share (BofA and Treasury 2009). The preferred shares were ranked pari passu with or senior to all other preferred shares in BofA, whether outstanding or not yet issued (BofA and Treasury 2009). The preferred shares qualified as Tier 1 capital (BofA 2009a).

The preferred shares paid a cumulative 8% annual dividend, computed on a 360-day basis, payable in arrears on the 15th of February, May, August, and November (BofA and Treasury 2009). The 8% rate was calculated cumulatively on (a) the liquidation amount per share; and (b) the amount of accrued and unpaid dividends of any prior dividend period (BofA and Treasury 2009). If dividend payments were not paid in full on the respective payment date, the dividends were “declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share” (BofA and Treasury 2009).

Per the agreement, the Treasury could sell the preferred shares only to a qualified institutional buyer (BofA and Treasury 2009). BofA was obligated to provide notice to Treasury of its intention to redeem preferred shares at least 30 days before—but not more than 60 days before—its planned redemption date (BofA and Treasury 2009). BofA could not redeem the TIP shares until it redeemed the $25 billion CPP preferred shares (BofA’s $15 billion and Merrill Lynch’s $10 billion) (BofA 2009a). CPP participants could redeem shares after three years or upon completing a qualified equity offering—raising additional Tier 1 or Tier 2 capital through private markets equal to at least 25% of the Treasury’s investment (Lawson and Kulam 2021).

The shares were nonvoting but did confer class voting rights on the following: (a) the issuance of shares senior to the TIP preferred shares; (b) amendments to the rights of the TIP preferred shares; and (c) mergers, acquisitions, or other exchanges that could adversely affect the rights of the TIP preferred shareholder (BofA and Treasury 2009). Further, the Treasury would retain the right to elect two directors to the board of BofA in the event that dividends were not paid in full for a total of six dividend periods (regardless of whether those periods were consecutive) but that election right would terminate at any time at which BofA had paid all previous dividend periods (BofA and Treasury 2009).

Treasury had no right to convert the preferred shares into any other securities (BofA and Treasury 2009).

Warrants

BofA issued warrants to Treasury to purchase 150,375,940 shares of common stock at a strike price of $13.30^FNBofA and Treasury could revise this price though, for example in the case that BofA completes a pro rata repurchase of common stock (BofA and Treasury 2009). (BofA and Treasury 2009). The warrants expired after ten years (BofA and Treasury 2009). The warrant shares did not have voting rights (BofA and Treasury 2009). In the event of registration, Treasury agreed to a 30-day minimum holding period between notifying BofA of its intent to sell the warrants and the day on which it could sell them (BofA and Treasury 2009). The warrants were fully transferrable, in whole or in part (BofA and Treasury 2009).

Upon the redemption (in whole) of the preferred shares, BofA could repurchase the warrants from Treasury at fair market value (BofA and Treasury 2009).

Under the TIP, the Treasury purchased $20 billion of newly issued preferred stock, using taxpayer funds. BofA had already received $25 billion, the maximum capital allocation under the CPP for an individual company. TIP thus brought the total recapitalization of BofA (CPP and TIP combined) to $45 billion (SIGTARP 2009).

The $20 billion figure was based on a review by supervisors and other Fed officials as to the amount that would be sufficient to reassure the market that BofA would be stable (House Oversight Committee 2009b).

BofA first received $15 billion in capital injections from the Treasury through the CPP on October 28, 2008, along with all other CPP recipients, with the exception of Merrill Lynch. The CPP allotted $10 billion to Merrill Lynch; those funds were earmarked either directly to Merrill Lynch or to BofA if it first completed its acquisition of Merrill Lynch. On January 9, BofA received the allotted $10 billion, bringing the total CPP support to $25 billion (COP 2009b; SIGTARP 2009).

The timing of the TIP support coincided with the completion of the merger in January 2009. BofA announced plans to merge with Merrill Lynch on September 15, 2008 (COP 2009b). In December 2008, Merrill Lynch showed unexpected losses, prompting BofA’s CEO to notify then–Treasury Secretary Paulson and Fed Chair Bernanke that BofA was considering invoking the MAC clause in the merger agreement, potentially allowing BofA to opt out of the acquisition. Fed and Treasury officials worried that such a decision would adversely affect both banks and cause disturbances in the broader financial market (SIGTARP 2009). On December 21, 2008, following discussions with the Fed and Treasury, BofA agreed to complete the merger while requesting a written assurance that the Treasury would provide BofA additional government support (SIGTARP 2009). Secretary Paulson declined to offer such an assurance, stating that additional assistance required a formal decision-making process and that it would become a disclosable event. However, both the Treasury and Fed assured BofA that they would not allow a systemically important bank to fail (SIGTARP 2009).

After the decision to complete the merger, BofA requested additional government assistance. On January 1, 2009, BofA completed the merger, and on January 16, 2009, the Treasury injected $20 billion of TIP funds by purchasing newly issued preferred shares (SIGTARP 2009). As indicated by emails between Fed officials, BofA wanted to secure government assistance by its fourth-quarter earnings release on January 16, 2009, the day it ultimately received TIP funds (Fed 2009d; O’Connor, Bush, and Mayo 2009).

BofA did not undergo restructuring during its participation in the TIP.

Under BofA’s TIP agreement, the Treasury would retain the right to elect two directors to the board of BofA in the event that dividends were not paid in full for a total of six quarterly dividend periods (regardless of whether those periods were consecutive) (BofA and Treasury 2009). The election right would terminate at any time at which BofA had paid all previous dividend periods (BofA and Treasury 2009). The CPP investments also contained the same aforementioned provisions (Lawson and Kulam 2021).

If the aggregate liquidation value of the TIP shares fell below 10% of the purchase price, BofA was obligated to allow: (a) Treasury (and any of its consultants, advisors, etc.) to examine its corporate books and discuss BofA’s finances and operations with its executives; (b) Treasury to review any information “material to [Treasury’s] investment” in BofA; and (c) Treasury, SIGTARP, and the GAO to access its books and other data (all subject to certain confidentiality limitations) (BofA and Treasury 2009).

The BofA agreement specified that all senior executive compensation plans had to be approved by Treasury and had to comply with the EESA (including the provisions previously enforced for the CPP); the BofA contract also limited “golden parachute payments” to senior managers (BofA and Treasury 2009). The BofA contract also limited bonus payments and placed restrictions on lobbying and corporate expenses (BofA and Treasury 2009).

The preferred shares restricted common stock dividend payments and equity repurchases (BofA and Treasury 2009). The BofA agreement prohibited the payment without Treasury’s consent of (a) quarterly dividends on common stock in excess of $0.01 per share; (b) any dividends payable in common stock shares; or (c) dividends or distribution rights for junior stock (BofA and Treasury 2009). Further, the BofA agreement prohibited the repurchase without Treasury consent of any equity securities (to include common stock, trust preferred securities, etc.), subject to some exceptions (BofA and Treasury 2009).

Research did not uncover regulatory relief accompanying TIP support.

In compliance with the American Recovery and Reinvestment Act of 2009, Treasury had to permit repayment of any TARP capital (see Key Design Decision No. 3, Legal Authority). However, Treasury approval for repayment of TARP capital was conditional on consultation with the appropriate federal banking authority, in this case the Federal Reserve Bank of New York (SIGTARP 2011). Financial institutions aiming to repay TARP investments were subject to existing supervisory procedures for the approval of redemption requests for capital instruments, which included assessments by the bank regulator of, inter alia, soundness, capital adequacy, and lending capacity (SIGTARP 2011).

The Treasury also stipulated that BofA couldn’t redeem TIP (Series R) unless it had redeemed CPP (Series N and Q); and it couldn’t redeem CPP until it raised $25 billion in capital.

On December 9, 2009, BofA repurchased all Treasury investments in BofA made through TARP (inclusive of CPP, AGP, and TIP) (BofA 2010). By March 3, 2010, Treasury sold its outstanding warrants from the BofA TIP and for a total proceed of $1.2 billion (Treasury 2015).

Between the sale of the warrants and cumulative dividend payments, the Treasury received $2.7 billion in income (excluding interest expense) from the TIP BofA investment (Treasury 2013; Treasury 2015).