NEW YORK (
Bank of America
may no longer have a loss-sharing agreement with the U.S. government to backstop its toxic assets, but
should keep its own plan in place just in case there is a "double-dip" recession or some other unforeseen economic catastrophe, one analyst says.
As part of the bailout efforts to stabilize the struggling financial institution late last year, the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. agreed to guarantee $301 billion worth of Citi assets, including loans and securities primarily backed by residential real estate, consumer loans, and some commercial real estate holdings, among other things. The government and Citi finalized the terms of the deal in January.
BofA, based in Charlotte, N.C., had a similar loss-sharing agreement in place on $118 billion worth of risky assets it inherited through its merger with Merrill Lynch, which was completed in January. Its deal, however, was tentative and the bank never used the guarantees, nor did it even officially sign a contract for the agreement.
After much controversy,
was able to terminate the arrangement on Monday, agreeing to make a $425 million payment to the government. BofA also said the same day that it will no longer issue debt backed by FDIC guarantees.
Despite comments from the
on Wednesday saying that economic activity has begun to pick up, Citi, given its troubles, should remain cautious, according to David Trone, an analyst at Fox Pitt Kelton Cochran Caronia Waller, a investment advisory and research firm.
"We believe Citi should and will keep the loss-sharing plan in place, despite its high costs and the unlikelihood that it will ever use it," says Trone in a note to clients. "The probability that the U.S experiences a downward double-dip like that seen in the 1930's may be remote, but not so remote that Citi will drop the protection just yet."
Trone says a termination could come in early 2010.
As part of Citi's deal, the company would take the hit on the first $39.5 billion of losses of the portfolio. After that, 90% of the losses would be absorbed by the Treasury Department with the remaining 10% to be absorbed by Citi. Citi agreed to a five-year coverage period for non-residential assets and up to 10 years for residential assets, the company said back in January.
Trone estimates that Citi's total losses on the loan portion of the assets to be $30.7 billion and losses on the securities and other commitments to be "manageable," according to the note. "Thus, total losses are unlikely to exceed Citi's first-loss piece
of $39.5 billion."
So far, Citi has incurred cumulative losses of $5.3 billion on the pool, which had declined to $266 billion as a result of repays and charge offs, according to Trone.
Citi shares fell 2.8% to $4.52 in Wednesday's session. Volume of more than 600 million was again good for most active issue on the New York Stock Exchange.
--Written by Laurie Kulikowski in New York.