Jan. 16 (Bloomberg) -- Bank of America Corp., the largest U.S. bank by assets, posted its first loss since 1991 and cut the dividend to a penny after receiving emergency government funds to support the acquisition of Merrill Lynch & Co.

The fourth-quarter loss of $1.79 billion, or 48 cents a share, compared with net income of $268 million, or 5 cents, a year earlier, the Charlotte, North Carolina-based company said in a statement today. Results exclude $15.3 billion in losses at Merrill, which was acquired earlier this month.

The losses, coupled with the U.S. lifeline of $138 billion, put more pressure on Chief Executive Officer Kenneth D. Lewis to make the takeovers of Merrill and mortgage lender Countrywide Financial Corp. pay off. Lewis has drawn criticism from analysts for rescuing the two money-losing companies, and the bank told investors on a conference call today to expect more and possibly bigger losses in the quarters ahead.

“We just thought it was in the best interest of our company and our stockholders and the country to move forward with the original terms and timing” for buying New York-based Merrill, Lewis said today. Renegotiating the deal could have cost more than it would have saved, and the government -- which insisted the deal go forward -- promised financial help in “recognition of the position Bank of America was in,” Lewis said.

The bank’s shares dropped 27 cents, or 3.3 percent, to $8.05 at 9:51 a.m. in New York Stock Exchange composite trading. The quarterly loss was less than the $3.6 billion that Citigroup Inc. analyst Keith Horowitz estimated on Jan. 11. Bank of America’s 32-cent dividend was reduced to one cent after being chopped from 64 cents last year.

Market Stability

Bank of America’s stock had plummeted 75 percent through yesterday since the Merrill Lynch takeover was announced. It’s down more than 40 percent in 2009.

The government said earlier today it will invest $20 billion in Bank of America and guarantee $118 billion of assets to help the company absorb Merrill and prevent the financial crisis from deepening.

The agreement is part of a commitment to “support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington.

About three-quarters of the federal aid is intended to cushion Merrill’s losses, with the rest for Bank of America, Chief Financial Officer Joe Price told investors during today’s conference call.

Changing Course

“This thing is unraveling so fast Lewis may know his job is lost,” said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia, who has an “underperform” rating on Bank of America. The management team has “lost credibility,” he said before results were announced.

“You will see the benefits” when the economy improves, Lewis told investors. The bank doesn’t comment on “uninformed gossip,” spokesman Robert Stickler said.

For the full year, profit fell to $4.01 billion from $14.98 billion. Separately, Citigroup posted an $8.29 billion quarterly loss today, completing the worst year in its history.

Lewis, 61, said Sept. 15 the purchase of Merrill gave Bank of America “one of the premier wealth management” companies and was “a great opportunity for our shareholders.” He also said at the time that the company didn’t anticipate needing further financial aid from the government. The takeover was announced as New York-based securities firm Lehman Brothers Holdings Inc. slid into the biggest bankruptcy in U.S. history.

Market Turmoil

Bank of America officials then told regulators last month that the Merrill deal might be abandoned because of worse-than- expected results, Lewis said. The government insisted the transaction proceed because its collapse would create new turmoil in the financial system, he said.

Credit-default swaps on Bank of America fell 10 basis points to 189 according to CMA Datavision prices at 6:50 a.m. in New York. The swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. Prices fall when investors become more confident about a company’s health.

The bank is cutting as many as 35,000 jobs to reduce annual costs by about $7 billion. Bank of America also has taken steps to counter loan losses by selling a $2.8 billion share of its China Construction Bank stake.

TARP Funds

Today’s emergency action shows how government officials, led by U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke, have failed to quell concerns about the viability of the nation’s biggest banks, even after deploying $350 billion of financial-rescue funds. Financial companies have disclosed more than $1 trillion of writedowns and credit market losses since 2007 linked to the collapse in subprime mortgages, according to data compiled by Bloomberg.

The Bank of America plan mirrors the emergency actions taken in November for New York-based Citigroup, when the government explicitly insured the bank against losses on toxic assets, with taxpayers footing the bill. The U.S. backed up $306 billion of Citigroup real-estate loans and securities, sharing losses beyond $29 billion for what may be some of the company’s worst holdings.

Fire Fighting

In the Bank of America deal, the government will protect a $118 billion pool of assets that a U.S. official said includes residential and commercial real-estate holdings and credit- default swaps. The official spoke to reporters on a conference call on condition of anonymity.

The $20 billion purchase of preferred shares, which carry an 8 percent dividend, will be made later today. The funds come from the first half of the Treasury’s Troubled Asset Relief Program. The U.S. Senate voted yesterday to allow the release of the next $350 billion of the program.

“This is more short-term fire-fighting tactics,” said Ed Rogers, chief executive officer of Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K.

The U.S. had already injected $15 billion into Bank of America and $10 billion into Merrill to bolster the combined company against the credit crunch.

Bank of America charged off $5.54 billion of loans as uncollectible, equal to 2.36 percent of total average loan and leases, compared with 0.91 percent a year earlier, the statement said. The provision for loan losses increased to $8.5 billion from $6.45 billion in the third quarter because of “economic stress on consumers,” the bank said.

List of Losses

The bank reported “market disruption-related impacts of $4.6 billion,” including losses on collateralized debt obligations of $1.7 billion and writedowns on securities backed by commercial mortgages of $853 million. The bank said it wrote down $429 million from leveraged loans and $353 million from auction-rate securities.

Merrill Lynch’s loss included writedowns of $1.9 billion on leveraged loans, $1.2 billion in investment securities and $1.1 billion on commercial real estate. The company also cut the value of its contracts with financial guarantors by $3.2 billion, Bank of America said. Merrill’s wealth management division had $2.6 billion in net revenue with the best performance stemming from its U.S. advisory unit, the bank said.

Merrill’s results weren’t part of the bank’s financial statements because the transaction was completed on Jan. 1.

Lending Review

The Countrywide acquisition is “on track” and likely to reach $900 million in annual cost savings by 2011, the bank said.

Bank of America said it formed a group that will meet weekly with Lewis to review lending “and what more can be done while remaining prudent and responsible.” Congressional leaders and business groups have criticized U.S. banks for curtailing credit after receiving government assistance.

Lewis has spent $129 billion on acquisitions, including regional lenders FleetBoston Financial Corp. and LaSalle Bank, credit-card issuer MBNA and investment manager U.S. Trust Co.

Bank of America agreed to buy Merrill, the world’s largest brokerage firm, after a weekend of negotiations between Lewis and Merrill CEO John Thain, for $19.4 billion.

“Bank of America has all kinds of problems with its acquisitions,” said Gary Townsend, a former bank analyst and president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “They’ve been so acquisitive, they find themselves with very little in tangible equity.”

Treasury Accord

The agreement with the Treasury, the Fed and FDIC calls on Bank of America to absorb the first $10 billion of losses from its pool of assets, the “large majority” of which were assumed with the Merrill purchase, according to the government’s statement. The company will absorb 10 percent of any additional losses, with the government on the hook for the remainder.

The Fed will backstop assets with a loan, after the government’s first $10 billion in losses, shared by the Treasury and the FDIC. The asset pool includes cash assets with a current book value of as much as $37 billion and derivatives with maximum potential future losses of as much as $81 billion, according to the term sheet provided by the government.

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net

Last Updated: January 16, 2009 10:00 EST