The federal government is close to committing billions of additional aid to Bank of America Corp. as it tries to digest its Jan. 1 acquisition of Merrill Lynch & Co. Inc., people familiar with the situation said Wednesday.

The discussion began in mid-December, when B of A told the Treasury Department it was unlikely to complete the purchase, because of Merrill's larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.

The Treasury, concerned that the deal's failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte lender on the "formulation of a plan" that includes new government capital. The terms are still being finalized, the person said, and details are expected to be announced with B of A's fourth-quarter earnings report Tuesday.

Any possible arrangement might protect B of A from losses on Merrill's bad assets. There would be a cap on the amount of losses the buyer would have to absorb, with the federal government being on the hook for the rest, according to one person familiar with the matter.

The possible deal is further evidence of the banking system's delicate condition and its hunger for more capital, despite the billions of dollars already invested in financial institutions by the federal government. Thus far B of A has received $25 billion of federal rescue aid, including $10 billion that Merrill would have received if not for the sale.

The Treasury has committed the entire first half of its $700 billion Troubled Asset Relief Program, though some funds have not been spent, and Congress has yet to release the second. The Federal Reserve Board also has wide-ranging powers to help financial institutions, as does the Federal Deposit Insurance Corp.

The talks with B of A were driven by Treasury Secretary Henry Paulson, people familiar with the matter said, because he was concerned that the deal would not close without help, leaving Merrill adrift. a person familiar with the talks said the deal did close Jan. 1 with the understanding that the two sides would hammer out a plan.

Some analysts expect B of A to report a loss for the fourth quarter, or at least a smaller profit than expected. It is not known exactly how much Merrill lost in the quarter.

With its recent acquisitions of Merrill and Countrywide Financial Corp., B of A is now a major player in every corner of the battered U.S. financial system, from credit cards and home mortgages to underwriting, merger advice and wealth management.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.