BofA should pony up for U.S. guarantee
Even though the bank never signed a deal to cover Merrill Lynch assets, it should pay for the perceived assurance it got from Uncle Sam.
(breakingviews.com) -- Ken Lewis should get out his checkbook. The Bank of America boss never signed the deal he cut in January for the U.S. to backstop some $118 billion in Merrill Lynch assets. But that didn't become known until May, when the firm announced it wouldn't be taking the guarantee.
In the interim, BofA (BAC, Fortune 500) benefited from investors' belief that it had government backing. It owes U.S. taxpayers something for that.
The question is, how much? The bank is trying to wriggle out of paying anything, saying the deal was never consummated, according to Bloomberg. But the widely held understanding that the backstop was in effect probably had a calming influence on investors that helped the Charlotte, N.C.-based bank weather the worst of the first-quarter tumult.
So the government is pushing back, arguing that it is owed at least some of the $4 billion fee that the bank had provisionally agreed to pay in preferred stock and warrants.
Some have argued that BofA should pay a third of the original fee, or $1.3 billion, since the bank benefited from the arrangement for a third of the year. That may be too steep - not least since the preferreds and warrants were to pay for 10 years' coverage.
There are a couple of other options: One would be to charge BofA an M&A-like break fee of, say, 5% of the consideration that would have changed hands -- or $200 million. Another would be to charge the bank a fee for having what was effectively a $100 billion undrawn line of credit.
At the full annual rate of around 20 basis points, that too would put the bill at $200 million. That seems a tad cheap for what might have been life-saving U.S. government help. Perhaps a better answer for the government is to split the difference, sending BofA a bill for nearer $750 million.
That would let the bank off relatively easily, provide some compensation for the risk shouldered by taxpayers -- and send a message that Uncle Sam's warm embrace comes with a price. ![]()
-
The folks on Fortune's 40 under 40 list may be rising stars, but they're not perfect. Here are the decisions they most regret in their careers. More -
Which young executives at public companies raked it in - and how much did they earn? More -
Who cares if lower pay lures some of the finest away? It's not as if they were doing a good job to begin with. More -
The man who led the auto bailout tells about the state of the carmaker's finances and management. More -
After the Vista debacle, Windows 7 is winning raves. But can Microsoft take on Google? More -
Energy, power and banking lead the list of the nation's - and some of the world's - biggest companies. More -
You don't have to be a master of the universe to snag works by Lichtenstein and Rauschenberg. More
