Your tax dollars, soon to be at work in Bank of America

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The government late Thursday agreed to a $138-billion package of fresh capital and loan guarantees for Bank of America Corp., in a move to try to bolster Wall Street’s confidence in the nation’s largest bank.

The deal will cost Bank of America shareholders their cash dividends, and the bank will have to submit its executive pay decisions for government approval.

The aid package was rushed this week after the bank’s shares plummeted on fears that its capital would be seriously depleted by mounting loan losses, particularly at its brokerage unit, Merrill Lynch. Bank of America agreed to buy Merrill in September as the deepening credit crunch threatened to topple the brokerage. The stock-swap deal, originally valued at $50 billion, was consummated Jan. 1, and apparently only in recent weeks did the extent of Merrill’s asset troubles become evident.

The bank’s stock plunged 18% on Thursday to $8.32, its lowest since 1991.

Here are key elements of the pact between Bank of America and the Treasury, the Federal Reserve and the Federal Deposit Insurance Corp.:

-- The Treasury will inject $20 billion of fresh capital into the bank, on top of the combined $25 billion infusion the company and Merrill received in the fall as part of the first wave of the government’s financial-system bailout.

In return for the new money, the bank will issue to the Treasury preferred stock paying an 8% dividend yield -- an increase from the 5% yield on preferred stock issued in the first phase of the bailout.

-- The government will provide a backstop, or guarantee, for up to $118 billion of bad real estate loans, corporate debt and related securities on Bank of America’s books. ‘The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch,’ the Treasury said in a statement.

The bank will absorb the first $10 billion in losses on the loan pool, and the government the next $10 billion. Beyond that, the government will eat 90% of any losses, and the bank will eat 10%. The Federal Reserve will provide a loan to Bank of America to back the asset pool. The government’s terms mimic those it gave Citigroup Inc. in November when it agreed to backstop $306 billion of that bank’s toxic assets.

-- As a fee for the asset guarantee, Bank of America will issue to the Treasury and the FDIC an additional $4 billion of preferred stock paying an 8% dividend yield.

-- The bank will be prohibited from paying common stock dividends in excess of 1 cent a share per quarter for three years without government consent. Bank of America currently pays a dividend of 32 cents a share per quarter, which was slashed by 50% in October as loan losses surged.

But the government said that ‘a factor taken into account for consideration of consent is the ability to complete a common stock offering of appropriate size.’

-- Bank of America’s executive compensation plan, including bonuses, must be approved by the government.

The bank’s shareholders may well blame CEO Ken Lewis for risking the company’s solvency with the Merrill deal, which was sealed in September without government help. Still, by stepping up to keep Merrill from collapsing, Lewis can argue that he did the government a favor. The question is whether that will keep angry shareholders from demanding Lewis’ head.

-- Tom Petruno

Top photo: A Bank of America office in New York. Credit: Mark Lennihan / Associated Press