Bank of America was a key player in preventing the systemic failure of the financial system, first by acquiring the teetering Countrywide Financial, and later with its emergency purchase of Merrill Lynch. But Merrill apparently came with a surprise—a $15.3-billion net loss in the fourth quarter. So BofA applied for help under the Targeted Investment Program—TIP—and Treasury said yes.

BofA will get a government backstop for up to $118 billion of troubled assets—the “[g]uarantee is in place 10 years for residential assets and 5 years for non-residential assets,” according to Treasury’s summary of terms. The bank takes on all losses up to $10 billion; Treasury and the Federal Deposit Insurance Corp. absorbs the next $10 billion; the rest is a 90/10 split, with the government taking the bigger hit. The agreement will cost BoA $4 billion in preferred stock and warrants, along with fees on the Federal Reserve loan facility involved.

In addition to the backstop, the bank will be granted another $20 billion in Capital Purchase Program money in exchange for preferred stock, limits on executive compensation, and a implementation of a mortgage loan modification program; BofA’s CPP total so far comes to $45 billion.

The U.S. government will own 6 percent of the bank and become BofA’s largest shareholder, analysts note. Some expect government stakes in the U.S. financial sector to expand further. The Fed, after all, owns 79.9 percent of AIG. “There’s a saying that bad facts make bad laws, and trying to respond to crises makes bad policy,” says John Douglas, chairman of the banking and financial group at Paul Hastings. “But you have to recognize that Treasury, the Fed, and to a lesser extent the FDIC have been trying to hold the financial system together—you have to give them credit for trying.”

Douglas sees several serious problems with the efforts, however. “First, the government has put all this money into the banks but has yet to address the asset side of the equation. You’ve also created a situation where government is both an owner and a regulator, and trying to use its position as an owner to force policy changes.” The government now owns “significant chunks of institutions. Can you ever stop? Probably not.”  As for TARP, “we don’t see accountability on either side,” Douglas complains. “There’s very obscure behind the scenes stuff. And our markets require clarity and transparency.”

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