"Ring Fencing" Bank of America

from www.federalreserve.gov

January 15, 2009

Summary of Terms

Eligible Asset Guarantee

Eligible Assets: A pool of financial instruments consisting of securities
backed by residential and commercial real estate loans and
corporate debt, derivative transactions that reference such
securities, loans, and associated hedges, as agreed, and
such other financial instruments as the U.S. government
(USG) has agreed to guarantee or lend against (the Pool).
Each specific financial instrument in the Pool must be
identified on signing of the guarantee agreement. Financial
instruments in the Pool will remain on the books of
institution but will be appropriately “ring‐fenced.”

The following financial instruments will be excluded from
the Pool: (i) foreign assets (definition to be provided by
USG); (ii) assets originated or issued on or after March 14,
2008; (iii) equity securities; and (iv) any other assets that
USG deems necessary to exclude.

Size: The Pool contains up to $118 billion of financial
instruments. More specifically, the Pool includes cash
assets with a current book (i.e., carrying) value of up to
$37 billion and a derivatives portfolio with maximum
potential future losses of up to $81 billion (based on
valuations agreed between institution and USG).

Term and Coverage of Guarantee:

Guarantee is in place for 10 years for residential assets and
5 years for non‐residential assets. Residential assets will
include loans secured solely by 1‐4 family residential real
estate, securities predominately collateralized by such
loans, and derivatives that predominately reference such
securities. Institution has the right to terminate the
guarantee at any time (with the consent of USG), and the
parties will negotiate in good faith as to an appropriate fee
or rebate in connection with any permitted termination. If
institution terminates the guarantee, it must prepay any
January 15, 2009 outstanding Federal Reserve loan (described below) in full.

Guarantee covers Eligible Losses on the Pool. Eligible
Losses are the aggregate incurred credit losses (net of any
gains and recoveries) on the Pool during the term of the
guarantee, beyond the January 15, 2009, marks and credit
valuation adjustments for the Pool (as agreed between
institution and USG). Eligible Losses do not include
unrealized mark‐to‐market losses but do include realized
losses from a sale permitted under the asset management
template (described below).
Deductible: Institution absorbs all Eligible Losses in the Pool up to
$10 billion.

USG (UST/FDIC) will share Eligible Losses in the Pool in
excess of that amount, up to $10 billion. All Eligible Losses
beyond the institution’s deductible will be shared USG
(90%) and institution (10%).

Financing: Federal Reserve will provide a non‐recourse loan facility to
institution, subject to institution’s 10% loss sharing.
Federal Reserve loan commitment will terminate (and any
loans thereunder will mature) on the termination dates of
USG guarantee. Institution has the right to terminate the
Federal Reserve loan commitment and prepay any Federal
Reserve loans at any time (with consent of Federal
Reserve).

Federal Reserve will charge a fee on undrawn amounts of
20 bp per annum and a floating interest rate on drawn
amounts of OIS plus 300 bp per annum. Interest and fee
payments will be with recourse to the institution.

Institution may draw on Federal Reserve loan facility if and
when additional mark‐to‐market and incurred credit losses
on the Pool reach $18 billion.

January 15, 2009
Fee for Guarantee – Preferred Stock and Warrants:

Institution will issue to USG (UST/FDIC) (i) $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. The fee may be adjusted, as necessary, based on
the results of an actuarial analysis of the final composition
of the Pool, as required under section 102(c) of the
Emergency Economic Stabilization Act of 2008.

Management of Assets:
Institution generally will manage the financial instruments
in the Pool in accordance with its ordinary business
practices, but will be required to comply with an asset
management template provided by USG. This template will
require institution, among other things, to obtain USG
approval (not to be unreasonably withheld) before any
Material Disposition. A Material Disposition is a disposition
of financial instruments in the Pool that creates an Eligible
Loss that, combined with other dispositions of Pool
instruments in the same year, exceeds 1% of the Pool size
at the beginning of the year. This template also will
include, among other things, a foreclosure mitigation policy
acceptable to USG.

Revenues and Risk Weighting:
Institution will retain the income stream from the Pool.
Risk weighting for the financial instruments in the Pool will
be 20%.

Dividends: Institution is prohibited from paying common stock
dividends in excess of $.01 per share per quarter for three
years without USG consent. A factor taken into account for
consideration of USG consent is the ability to complete a
common stock offering of appropriate size.

Executive Compensation:
An executive compensation plan, including bonuses, that
rewards long‐term performance and profitability, with
appropriate limitations, must be submitted to, and
January 15, 2009
approved by, USG. Executive compensation requirements
will be consistent with the terms of the preferred stock
purchase agreement between USG and institution.

Corporate Governance:
Other matters as specified, consistent with the terms of the
preferred stock purchase agreement between USG and
institution.

The foregoing is accepted and agreed
by and among the following as of
January 15, 2009:

DEPARTMENT OF THE TREASURY
FEDERAL RESERVE BOARD
BANK OF AMERICA CORPORATION
FEDERAL DEPOSIT INSURANCE CORP



So we now have the playbook on how the government will ring-fence (nationalize? I guess its a matter of semantics at this point) the big banks. None of the systematically important big banks will be allowed to fail. The government will provide guarantees on bad assets. It might be better to actually remove these assets from the balance sheets and create a bad bank. This will provide the banks will more confidence to lend. But this shouldnt be done without mechanisms for appropriate oversight. This move is important and is a good move. It begins to restore confidence in the financials. Transparency is still missing but hopefully the new administration will be able to provide that in the future. The tackling of insolvency has begun in the first quarter and overall this is very positive news. There are still other institutions out there. We need to get those under control asap as well. This slow bleed - Countrywide, Merill, Wachovia, Freddie / Fannie, AIG, Bank of America is unfortunate. There are others with bad assets - those should all be dealt with speedily and in this quarter!

This is how you squeeze an Investment Bank

Bank of America Said to Cut Off Merrill Before Deal (Update1)
By Bradley Keoun and David Mildenberg

Sept. 18 (Bloomberg) -- Merrill Lynch & Co. Chief Executive Officer John Thain told employees that Bank of America Corp. ``cut our trading lines'' in the days before it bought the firm, signaling a loss of confidence in the brokerage's ability to pay.

Thain made the comments while explaining his decision to sell Merrill, according to five employees who attended the event at the company's New York headquarters. The Sept. 15 remarks were rebroadcast on an internal system to all 60,000 employees.

``Before the trade was done Bank of America cut our trading lines,'' Thain said at the meeting, according to the people, who declined to be named because they weren't authorized to discuss the internal meeting. ``We did get them to put it back.''

The disclosure shows how close at least one of Merrill's trading partners was to reducing its credit after a 36 percent decline in the firm's stock price last week. The shares tumbled on speculation Merrill might be the next securities firm to collapse following Lehman Brothers Holdings Inc., which filed for bankruptcy protection on Sept. 15 after investors and trading partners lost confidence in the New York-based company.

Since the Bank of America agreement was announced on Sept. 14, Merrill has gained 17 percent in New York trading. The second-biggest U.S. securities firm by market value rose 55 cents, or 2.8 percent, to $19.91 in composite trading today as of 11:14 a.m.

Merrill spokeswoman Jessica Oppenheim declined to elaborate on the Bank of America moves or say whether other firms had pulled back their trading lines. Scott Silvestri, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment, citing a policy of not discussing client matters.

Trading Lines
Trading lines include credit or liquidity sources that securities firms use to facilitate transactions or to meet cash needs.

Merrill began its talks with Bank of America on Sept. 13, even as the bank was considering a bid for Lehman, and struck a deal by nightfall the next day.

Since then, Merrill's stock was one of only two gainers -- the other is Jefferies Group Inc. -- in the 10-company Amex Securities Broker-Dealer Index. Morgan Stanley, the third-biggest firm, is down 46 percent this week, while No. 1 Goldman Sachs Group Inc. has tumbled 31 percent.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net. Last Updated: September 18, 2008 11:21 EDT