Merrill, BofA Sold $22.9 Billion of Commercial Paper to Fed in October '08

Bank of America Corp. and Merrill Lynch & Co. sold $22.9 billion of commercial paper to the Federal Reserve in October 2008, days after the two companies received $25 billion in U.S. bailout funds.

The Fed bought $7.96 billion of three-month notes from Merrill on Oct. 27, then purchased $14.9 billion from Bank of America two days later, according to data on the Commercial Paper Funding Facility. The transactions were disclosed today when the Fed, under orders from Congress, named firms that received $3.3 trillion in aid to stem the financial panic.

The purchases add to the tally of bailouts for Bank of America, the biggest U.S. lender by assets, which took $45 billion from the Troubled Asset Relief Program. The Charlotte, North Carolina-based bank agreed to buy Merrill in September 2008, accepted a combined $25 billion in TARP funds the next month, and needed another $20 billion to complete the purchase in January 2009 as losses surged at the New York-based broker.

“Commercial paper is the glue that holds the credit markets together,” said Tony Plath, a finance professor at the University of North Carolina at Charlotte. “At that time, none of the securities companies could roll over their short-term debt because the market wasn’t receptive. The Fed kept the crisis from ruining the entire credit market.”

Aid Repaid

Investor demand for commercial paper, an unsecured short- term loan typically issued to finance inventories and accounts receivable, evaporated in mid-2008 amid concern that the largest U.S. banks might fail. U.S. officials responded with expanded bank deposit insurance, loans, debt guarantees and capital injections.

“The funding and guarantee programs were an example of a successful government initiative at no taxpayer expense,” said Robert Stickler, a bank spokesman, in an e-mailed statement. “The programs enabled the U.S. financial system to continue to operate, preventing a recession from becoming much more severe,” he said. “We have repaid, with interest, all of the borrowings except some of those whose terms have not expired.”

Bank of America was also among the top borrowers from the Term Auction Facility, one of the Federal Reserve’s first and longest-lasting efforts to combat the financial crisis. Bank of America had three loans for $15 billion each outstanding as of Jan. 15, 2009, according to the Fed documents.

More Borrowing

On top of that, Bank of America and Merrill Lynch borrowed from the Term Securities Lending Facility, which provided longer-term funding. On March 27, 2008, Bank of America borrowed $7 billion from the Fed’s TSLF in exchange for $8.39 billion of collateral that included $6 billion of agency-backed mortgage debt and $2.37 billion of non-agency-backed mortgage debt.

That same day, Merrill Lynch borrowed $10 billion from the TSLF in exchange for $11.97 billion in collateral.

A day earlier, analyst Meredith Whitney cut earnings estimates for the largest U.S. banks by an average of 84 percent and predicted quarterly losses at Citigroup Inc. Merrill Lynch and UBS AG. Whitney, who then worked for Oppenheimer & Co., now heads her own advisory company.

The bank and Merrill tapped the facility more than 50 times between March 2008 and March 2009, while a unit of Countrywide Financial Corp. used it 10 times. Bank of America acquired Countrywide in July 2008.

Bank of America’s shares gained 35 cents, or 3.2 percent, to $11.29 at 4:15 p.m. in New York Stock Exchange trading. The shares have declined 25 percent this year.

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; James Sterngold in New York at jsterngold2@bloomberg.net.

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net; David Scheer at dscheer@bloomberg.net.

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