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WASHINGTON (AFP) – The US government extended a new lifeline Friday to Bank of America, injecting another 20 billion dollars in capital and guaranteeing 118 billion dollars in shaky assets to help it weather the ongoing financial crisis.

The latest bailout for the largest US bank by assets is aimed at helping Bank of America absorb broker Merrill Lynch, which faced a meltdown last year as the credit crunch intensified.

A joint statement by the US Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said the government would invest 20 billion dollars in the bank, on top of a 25-billion-dollar injection last year under the Troubled Asset Relief Program (TARP).

Additionally, the government "will provide protection against the possibility of unusually large losses" on 118 billion dollars of assets backed by residential and commercial real estate loans, which have been frozen due to the housing meltdown and credit crisis.

The banking giant will pay the government a dividend of eight percent on the investment and agree to limits on executive compensation. The bank also agreed to implement a "mortgage loan modification program" to limit foreclosures that have been rising, threatening to undermine a recovery in the housing sector.

"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," Treasury said.

The bailout comes with US authorities scrambling to avert a further collapse in the banking sector that could deal another economic blow. A similar deal was announced last year with Citigroup. But some analysts were skeptical.

"Like Citi, Bank of America has now received more in bailout money than it’s actually worth," said Barry Ritholtz at FusionIQ.

"How this can ever be a profitable investment?"

Bank of America appeared healthy enough to buy up troubled mortgage lender Countrywide Financial last year as well as Merrill Lynch.

But Robert Brusca at FAO Economics said the bank "simply bit off more than it could chew."

BofA has already received 25 billion dollars in capital injections from the TARP, a US financial bailout fund set up to help rescue mainly banks reeling from financial turmoil triggered by a home mortgage meltdown.

That included 10 billion dollars for the investment brokerage firm Merrill Lynch, which BofA bought in a deal that closed January 1.

BofA will absorb the first 10 billion dollars of losses and the US taxpayers will cover the next 10 billion. Any additional losses will be shared 90 percent by the US government and 10 percent by BofA.

The funds going to BofA come from bailout money that had been promised but not delivered, to other banks, a Treasury official told reporters in a pre-dawn conference call.

It will be up to the new president, Barack Obama — who takes office on Tuesday — to find new funds for the smaller banks, the official said.

The Treasury announcement came just hours before BofA released its fourth-quarter earnings and hours after the US Senate voted Thursday to release of the second half of the 700-billion-dollar TARP designed by the outgoing administration of President George W. Bush.

For the fourth quarter, Bank of America posted a loss of 1.7 billion dollars, after managing a modest profit of 268 million dollars a year earlier.

The results stem from soaring credit costs and massive write-downs. Merrill Lynch, which was not included in the results, lost over 15 billion dollars in the quarter.

The government aid comes as the banking sector remained in deep trouble from the real estate meltdown and subsequent credit crunch that has led to around one trillion dollars in worldwide losses.

Citigroup, which has been reeling from the crisis and received a similar bailout last year, announced Friday a quarterly loss of 8.29 billion dollars and said it was splitting into two businesses in an effort to restore profitability.

Bank of America on September 15 announced it was buying Merrill Lynch for 50 billion dollars in stock, scooping up the Wall Street icon battered by the housing and credit crisis.

While giving a lifeline to a troubled Wall Street giant, the deal creates the world’s largest financial services company.

The announcement came at the close of a tumultuous weekend that saw Wall Street rival Lehman Brothers seek bankruptcy protection, leading to an intensification of the crisis in the global financial system.

AFP | Friday, January 16, 2009