Bank of America 2008 Annual Report Download - page 192

Note 25 – Subsequent Events
In January 2009, in connection with the TARP Capital Purchase Program,
established as part of the Emergency Economic Stabilization Act of 2008
and in connection with the Merrill Lynch acquisition, the Corporation
issued to the U.S. Treasury 400 thousand shares of Bank of America
Corporation Fixed Rate Cumulative Perpetual Preferred Stock, Series Q
(Series Q Preferred Stock) with a par value of $0.01 per share for $10.0
billion. The Series Q Preferred Stock initially pays quarterly dividends at a
five percent annual rate that increases to nine percent after five years on
a liquidation preference of $25,000 per share. The Series Q Preferred
Stock has a call feature after three years. In connection with this invest-
ment, the Corporation also issued to the U.S. Treasury 10-year warrants
to purchase approximately 48.7 million shares of Bank of America Corpo-
ration common stock at an exercise price of $30.79 per share. Upon the
request of the U.S. Treasury, at any time, the Corporation has agreed to
enter into a deposit arrangement pursuant to which the Series Q Pre-
ferred Stock may be deposited and depositary shares, representing
1/25
th
of a share of Series Q Preferred Stock, may be issued. The Corpo-
ration has agreed to register the Series Q Preferred Stock, the warrants,
the shares of common stock underlying the warrants and the depositary
shares, if any, for resale under the Securities Act of 1933.
As required under the TARP Capital Purchase Program in connection
with the sale of the Series Q Preferred Stock to the U.S. Treasury, divi-
dend payments on, and repurchases of, the Corporation’s outstanding
preferred and common stock are subject to certain restrictions. The
restrictions are the same as previously discussed in connection with the
sale of the Series N Preferred Stock. For more information on these
restrictions, see Note 14 – Shareholders’ Equity and Earnings Per Com-
mon Share to the Consolidated Financial Statements.
Also in January 2009, the U.S. Treasury, the FDIC and the Federal
Reserve agreed in principle to provide protection against the possibility of
unusually large losses on an asset pool of approximately $118.0 billion
of financial instruments comprised of $81.0 billion of derivative assets
and $37.0 billion of other financial assets. The assets that would be
protected under this agreement are expected generally to be domestic,
pre-market disruption (i.e., originated prior to September 30, 2007) lever-
aged and commercial real estate loans, CDOs, financial guarantor coun-
terparty exposure, certain trading counterparty exposure and certain
investment securities. These protected assets would be expected to
exclude certain foreign assets and assets originated or issued on or after
March 14, 2008. The majority of the protected assets were added by the
Corporation as a result of its acquisition of Merrill Lynch. This guarantee
is expected to be in place for 10 years for residential assets and five
years for non-residential assets unless the guarantee is terminated by the
Corporation at an earlier date. It is expected that the Corporation will
absorb the first $10.0 billion of losses related to the assets while any
additional losses will be shared between the Corporation (10 percent)
and the U.S. government (90 percent). These assets would remain on the
Corporation’s balance sheet and the Corporation would continue to
manage these assets in the ordinary course of business as well as retain
the associated income. The assets that would be covered by this guaran-
tee are expected to carry a 20 percent risk weighting for regulatory capital
purposes. As a fee for this arrangement, the Corporation expects to issue
to the U.S. Treasury and FDIC a total of $4.0 billion of a new class of
preferred stock and to issue warrants to acquire 30.1 million shares of
Bank of America common stock.
If necessary, under this proposed agreement, the Federal Reserve will
provide liquidity for the residual risk in the asset pool through a
nonrecourse loan facility. As previously discussed, the Corporation would
be responsible for the first $10.0 billion in losses on the asset pool.
Once additional losses exceed this amount by $8.0 billion the Corpo-
ration would be able to draw on this facility. This loan facility would termi-
nate and any related funded loans would mature on the termination dates
of the U.S. government’s guarantee. The Federal Reserve is expected to
charge a fee of 20 bps per annum on undrawn amounts and a floating
interest rate of the overnight index swap rate plus 300 bps per annum on
funded amounts. Interest and fee payments would be with recourse to the
Corporation.
Further, the Corporation issued to the U.S. Treasury 800 thousand
shares of Bank of America Corporation Fixed Rate Cumulative Perpetual
Preferred Stock, Series R (Series R Preferred Stock) with a par value of
$0.01 per share for $20.0 billion. The Series R Preferred Stock pays divi-
dends at an eight percent annual rate on a liquidation preference of
$25,000 per share. The Series R Preferred Stock may only be redeemed
after the Series N and Series Q Preferred Stock have been redeemed. In
connection with this investment, the Corporation also issued to the U.S.
Treasury 10-year warrants to purchase approximately 150.4 million
shares of Bank of America Corporation common stock at an exercise
price of $13.30 per share. Upon the request of the U.S. Treasury, at any
time, the Corporation has agreed to enter into a deposit arrangement
pursuant to which the Series R Preferred Stock may be deposited and
depositary shares, representing 1/25
th
of a share of Series R Preferred
Stock, may be issued. The Corporation has agreed to register the Series
R Preferred Stock, the warrants, the shares of common stock underlying
the warrants and the depositary shares, if any, for resale under the Secu-
rities Act of 1933.
As required under the TARP Capital Purchase Program dividend pay-
ments on, and repurchases of, the Corporation’s outstanding preferred
and common stock are subject to certain restrictions. In addition to these
restrictions, in connection with this arrangement, the Corporation will
comply with enhanced executive compensation restrictions and continue
with current mortgage loan modification programs. Additionally, any
increase in the quarterly common stock dividend for the next three years
will require the consent of the U.S. government.
190 Bank of America 2008