Bank of America bail-out agreed

Bank of America shares have fallen sharply.

Bank of America will receive $20bn (£13.4bn) in fresh US government aid and $118bn worth of guarantees against bad assets.

The emergency funding will help the troubled bank - the US's largest - absorb the losses it incurred when it bought Merrill Lynch.

In return for the money, the US Treasury will take a stake in the bank.

Just hours after the aid package was announced, Merrill Lynch posted a fourth-quarter 2008 loss of $15.31bn.

Bank of America reported a loss of $1.7bn, compared with a profit of $268m for the same period a year earlier.

Bank of America had been seen as one of the strongest US banks, at least until its decision to take over Merrill.

"They were probably one of the best banks out there, balance sheet-wise, until they did the Merrill deal," said Cassandra Toroian at Bell Rock Capital.

Financial stability

The government stepped in after fears that the deteriorating capital base threatened the viability of the bank and could have posed a threat to the financial sector and the wider economy.

It's a big question for Bank of America's management. They just went into an acquisition and now need aid. It looks like another bad deal with poor due diligence Peter Hahn, Cass Business School

"The objective of this programme is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings and retirement security," the US Treasury said.

In addition to the $20bn cash injection, the Treasury will "provide protection against the possibility of unusually large losses on an asset pool of approximately $118bn of loans".

The deal guarantees residential and commercial mortgage investments, derivatives and corporate debt.

Restrictions

In return for the aid, the bank must meet strict restrictions on executive pay.

US BAIL-OUTS Bank of America: $45bn Citigroup: $45bn AIG: $40bn JP Morgan: $25bn Wells Fargo: $25bn General Motors: $10.4bn Goldman Sachs: $10bn Morgan Stanley: $10bn GMAC: $5bn Chrysler: $4bn Source: US Treasury

Bank of America has already received $25bn in capital injections from the Troubled Assets Relief Programme, known as Tarp, the bail-out fund designed to rescue banks reeling from the financial crisis.

Its problems intensified when it decided to take over Merrill Lynch, another giant of the US banking industry that fell victim to the global credit crunch.

Bank of America underestimated the levels of debt it was taking on as a result of the deal.

"It's a big question for Bank of America's management. They just went into an acquisition and now need aid. It looks like another bad deal with poor due diligence," said Peter Hahn of The Cass Business School.

"It comes down to the cost of the acquisition of Merrill and the risks associated with the deal," said Gary Townsend at Hill-Townsend Capital.

Robert Peston, the BBC's business editor, said the decision to bail out Bank of America in light of the Merrill Lynch deal was an easy one.

"The US government was never going to cut up too rough when the biggest lender in America asked for a bit of additional help in absorbing the losses incurred on Merrill's holding of poisonous assets."

On Thursday, the US Senate approved the release of the remaining $350bn of the Tarp bail-out fund.

The Democrats in the House of Representatives also unveiled plans for a separate $825bn stimulus plan.

Called the American Recovery and Reinvestment Plan, it proposes $550bn in emergency spending with $275bn in temporary tax benefits over the next two years.