TOPICS > Economy

Bank of America Posts Big Losses, Citigroup Splits in Two

BY Admin  January 16, 2009 at 1:05 PM EDT

Citibank; File photo

The reports come as Bank of America, the largest U.S. bank, received $20 billion in new capital from the federal government to help it deal with bigger-than-expected losses associated with its move to absorb Merrill Lynch. In the fourth-quarter, Bank of America lost $1.79 billion while Merrill Lynch’s books took a record $15.31 billion loss.

A year ago, Bank of America posted a gain of net income of $268 million.

Bank of America Chief Executive Kenneth Lewis said the company went to the government after realizing that it could not complete the $19.4 billion takeover of Merrill Lynch without further aid.

Regulators had urged Bank of America to move forward with the challenge of absorbing Merrill Lynch in an effort to stem the tide of collapsing Wall Street titans.

“The government was firmly of the view that terminating or delaying the closing of the transaction could lead to significant concerns and could result in significant systemic concerns,” Lewis told reporters on a conference call, according to the New York Times. “We did think we were doing the right thing for the country.”

The $20 billion will come from the government’s $700 billion Troubled Asset Relief Program, or TARP, financial industry rescue fund. In total, Bank of America and Citigroup have each received $45 billion in TARP funds.

For its share, Bank of America has agreed to pay the government an 8 percent dividend on the capital and will also restrict executive pay.

The Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp issued a joint statement that said support for the bank was “to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.”

On Friday, Citigroup, once known as the champion of the “financial supermarket” model, announced it would split into two businesses, one called Citicorp that will focus on traditional banking and another called Citi Holdings that will be responsible for the company’s more volatile assets.

Citigroup CEO Vikram Pandit told investors on a conference call that his top priority was to return the company to profitability. The bank’s shares fell 87 percent since the beginning of 2008. After Friday’s announcement of the split, they rose 4 percent.

Citigroup also said that some members of its board, which has been blamed for the company’s difficulties, would be leaving.

“There has been one announced departure from the board. Together with other anticipated departures, this gives us the opportunity to reconstitute the board and we will do so as quickly as possible,” said Richard Parsons, Citi’s lead director, in a statement according to the Associated Press.

Former U.S. Treasury Secretary Robert Rubin is departing as Citigroup’s director later this year.

Earlier this week, Citigroup said it will sell Smith Barney, its brokerage business, to Morgan Stanley.