WASHINGTON (AP) - The federal government is considering a fresh multibillion-dollar aid package for Bank of America Corp. to help it absorb losses at Merrill Lynch.
A person with knowledge of the discussions said Thursday the new aid package could be modeled along the lines of the financial lifeline that was thrown to Citigroup Inc. in November. The person spoke on condition of anonymity because of the sensitive nature of the discussions.
Shares of both Bank of America and Citigroup plummeted more than 20 percent in early trading.
Bank of America could get another capital infusion from the government, and possibly secure government guarantees against losses on problem loans. A fresh capital injection could come from the Treasury Department's $700 billion bailout pot, while any money that might be put up for loan guarantees could come from a mix of government sources.
The Treasury Department already has pledged the first half of the bailout pot. Some money, however, hasn't actually been allocated. President-elect Barack Obama pleaded with Congress this week to release the second $350 billion of the bailout funds.
Bank of America has received a total of $25 billion in capital injections from the Treasury bailout fund, called the Troubled Asset Relief Program, or TARP. That includes $10 billion for Merrill Lynch & Co., which Bank of America bought in a deal that closed Jan. 1.
Even with the government aid, Bank of America's stock has been pummeled. Shares of the Charlotte, N.C.-based bank lost $2.65, or 26 percent, to $7.55 in morning trading, while Citigroup plunged $1.04, or 23 percent, to $3.49.
Bank of America, which reports its fourth-quarter and annual results next week, declined comment about a new aid package Thursday. The Wall Street Journal late Wednesday reported that the government was nearing a new deal with Bank of America.
Renewed fears about the stability of the financial industry has again gripped Wall Street in recent days, sending stocks plunging. Wall Street investors are worried about another round of losses from banks, which had been especially hard hit by the worst financial crisis since the 1930s.
Against that backdrop, the federal government has taken radical steps - including making capital injections in banks - to shore up the nation's shaky financial system and to try to get credit flowing more freely again. Problems, however, have persisted. Federal Reserve Chairman Ben Bernanke earlier this week made a forceful case that the second $350 billion bailout installment was critically needed.
In the Citigroup rescue late last year, the bank received a fresh $20 billion capital infusion from Treasury's bailout fund - after earlier receiving $25 billion - as well as government backing of billions in risky assets held by the bank.
Specifically, Treasury and the Federal Deposit Insurance Corp. provided a guarantee against the possibility of losses on up to $306 billion of risky loans and securities backed by New York-based Citigroup's commercial and residential mortgages. Funds from the FDIC and $5 billion from the bailout money would be used for the guarantees.
(Copyright 2009 by The Associated Press. All Rights Reserved.)