Morning Economic News - January 16, 2009

Unfortunately due to technical problems I can't do my usual complete roundup of yesterday's economic news for a second day, but with the big news that came out about 2 hours ago, I am going to write a brief post today. Regular reports will resume Monday the 19th.

About 11 PM the Treasury Department, FDIC and Federal Reserve announced an aid package for the Bank of America. Specifically, the agencies are providing "protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans". These loans have already been written down to their current, discounted market value. The bank has to meet some fairly stringent conditions including "enhanced executive compensation restrictions" and a "mortgage loan modification program". Treasury also announced that it's extending its Temporary Liquidity Guarantee Program up to 10 years for banks that do new consumer lending.

Major points:

1 - This is a big commitment, but should ultimately free up a lot of capital for new lending, a multiple of the amount involved.

2 - It addresses two of the biggest complaints about the string of financial bailouts - spendthrift executives getting big bonuses at taxpayer expense for driving their companies into the ground and banks accepting bailout funds and continuing not to lend.

3 - The B of A package addresses mortgage modification to attack the problem loans from the bottom as well as the top.

4 - This has been coming for a while and markets had it priced in over the last week.

Markets seem to be responding well to the news, with US stock market futures up just under 1% [2:50 AM Eastern]. The dollar is down against the euro, Canadian dollar and pound, but up against the yen - a reversal of the pattern that's been "normal" the last couple of weeks and may simply represent profit taking. The Nikkei closed up 2.58% and the Hang Seng is down a fraction of a percent. Oil is up less than half a percent.

Treasury press release follows:

anuary 16, 2009
HP-1356

Treasury, Federal Reserve and the FDIC Provide Assistance to Bank of America

Washington, DC – The U.S. government entered into an agreement today with Bank of America to provide a package of guarantees, liquidity access and capital as part of its commitment to support financial market stability.

Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value. The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch. The assets will remain on Bank of America's balance sheet. As a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Bank of America from the Troubled Assets Relief Program in exchange for preferred stock with an 8 percent dividend to the Treasury. Bank of America will comply with enhanced executive compensation restrictions and implement a mortgage loan modification program.

Treasury exercised this funding authority under the Emergency Economic Stabilization Act's Troubled Asset Relief Program (TARP). The investment was made under the Targeted Investment Program. The objective of this program is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security.

Separately, the FDIC board announced that it will soon propose rule changes to its Temporary Liquidity Guarantee Program to extend the maturity of the guarantee from three to up to 10 years where the debt is supported by collateral and the issuance supports new consumer lending.

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy. As was stated in November when the first transaction under the Targeted Investment Program was announced, the U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks.