Academic

During the crisis, BofA looked like a great help, jumping in to buy Merrill and Countrywide at high prices before the government had to get involved.  I'm sure that in Washington the view was: good on them.  But now it's the reckoning:

• 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.

Fascinating.  I'm amazed the government could pull it off in the midst of the packing up of offices.  Also, one wonders how hard BofA negotiated to get the blame put on Merrill Lynch in the press release.  But $118 billion is a massive number to deal with in an afternoon, and the FDIC's head was almost saying that this sort of bailout wouldn't happen at lunch (she denied the government would nationalize the bank).  Still, its good to see that even now, in the end times, some government institutions (the SEC sat this one out, as always) don't want to give up mark to market accounting.

What about the fee?  The caveats due to the mysteries of accounting aside, it is really not very substantial compared with the size of the guarantee, "$4 billion of preferred stock with an 8% dividend rate (under terms described below); and (ii) warrants with an aggregate exercise value of 10% of the total amount of preferred issued."

Note that the Fed, apparently tired of opening its discount window to just anyone, stayed out of this one - even though it involved a bank squarely within its supervisory ambit.  If nothing else, one can say that the independence of the central bank - Bernanke and his board members essentially can't be fired by, and accordingly, not dictated to, by the President or his Treasury Secretary - really matters when it comes time to figure out who will be footing the bill for the latest bailout on the fly. 

And rest assured that it was on the fly: the term sheet for this $128 billion deal is three pages long, done, apparently, in one of those Microsoft Word bullet point-esque tables.

Two other observations - nothing here about Citi, which appeared to be in even more dire straits, and the $20 billion from the already exhausted TARP?  Seems like money spent not yet appropriated from Congress, which ordinarily is far beyond the pale.