EMERGENCY CAPITAL INJECTIONS 

PROVIDED TO SUPPORT THE VIABILITY 

OF BANK OF AMERICA, OTHER MAJOR 

BANKS, AND THE U.S. FINANCIAL 

SYSTEM 

SIGTARP-10-001 

OCTOBER 5, 2009
 

SIGTARP 

Office of the Special Inspector General 

for the Troubled Asset Relief Program 

Special Inspector General for the Troubled Asset Relief Program 

Summary of Report: SIGTARP-10-001 

Why SIGTARP Did This Study 

From about July 2007 through August 2008, 

financial markets were hit with news of large losses 

at major institutions resulting from, among other 

things, issues related to subprime loans. However, 

September 2008 became a month of historic 

turmoil in the financial markets, creating fear of a 

collapse of these markets. The Troubled Asset 

Relief Program (“TARP”) was created by the 

Emergency Economic Stabilization Act (“EESA”) 

on October 3, 2008. EESA provided the Secretary 

of the Treasury with authorities to restore the 

liquidity and stability of the financial system. On 

October 13, 2008, Treasury made its first use of 

this authority by providing capital injections into 

nine financial institutions, including Bank of 

America Corporation (“Bank of America”), under 

the TARP’s Capital Purchase Program (“CPP”). 

Merrill Lynch & Co., Inc. (“Merrill Lynch”), which 

was facing severe financial problems and was in 

the process of being acquired by Bank of America, 

was included in the initial nine banks. Following 

the completion of the acquisition of Merrill Lynch 

in January 2009, Bank of America received 

additional assistance under TARP’s Targeted 

Investment Program (“TIP”) and announced loss 

protections under the Asset Guarantee Program 

(“AGP”). 

Numerous questions have arisen over the initial 

CPP investment, Bank of America’s effort to 

terminate the merger in December 2008, efforts by 

federal officials to dissuade Bank of America from 

terminating, and the subsequent investment under 

TIP and loss protection under AGP. 

This report examines the basis for the selection of 

Bank of America and eight other financial 

institutions for TARP funds. Specifically, this 

report addresses (1) the significant economic 

events in September 2008 that led Treasury to 

inject capital into the financial system; (2) the 

rationale and criteria used to select these 

institutions compared to those used to select 

subsequent institutions for CPP participation; and 

(3) the basis for the decision by Treasury and 

federal regulators to provide Bank of America with 

additional assistance following the acquisition of 

Merrill Lynch, and federal efforts to forestall Bank 

of America from terminating the planned 

acquisition. 

What SIGTARP Recommends 

This report makes no recommendation, but it does 

identify an important lesson learned. As discussed 

in the report, federal officials should take more care 

in publicly characterizing the nature and objectives 

of their initiatives, since accuracy and transparency 

will enhance the credibility of Government

programs like TARP. 

October 5, 2009

Emergency Capital Injections Provided To Support the 

Viability of Bank of America, Other Major Banks, and the U.S. 

Financial System 

What SIGTARP Found 

In September 2008, a rapid-fire set of destabilizing financial events occurred, 

including the federal bailout of the Federal National Mortgage Association and 

the Federal Home Loan Mortgage Corporation, the failure of Lehman Brothers, 

and the bailout of American International Group, among others. These events 

and other failures caused runs on some financial institutions and the freezing of 

interbank short-term lending that is critical to the liquidity of financial 

institutions. Because federal regulators concluded that numerous attempts over 

the previous year to minimize damages to the financial system had proved 

insufficient, the Secretary of the Treasury and the Chairman of the Board of 

Governors of the Federal Reserve System determined that, without 

extraordinary measures, there was a significant risk of financial market 

collapse. Believing that time was of the essence, federal officials decided that a 

dramatic infusion of capital into major banks would demonstrate U.S. support 

for financial markets, hoping that this would help unfreeze the credit markets. 

After deciding that some TARP funds would be used to inject capital directly 

into the financial system, the government selected nine financial institutions to 

receive the initial $125 billion on an emergency basis as a dramatic show of 

U.S. government support to the financial system. The first nine institutions 

were selected because they represented a cross-section of the U.S. financial 

activities, but their systemic importance to the financial system and economy 

was a more significant consideration. Although announced as a program for 

healthy banks, senior Treasury and Federal Reserve officials had serious 

concerns about the health of some of the first nine institutions selected. Among 

these nine were Bank of America and Merrill Lynch, which together, received 

$25 billion in CPP funding. By providing CPP funds to the nine institutions, 

Treasury, the Federal Reserve, and federal regulators sought to promote 

investor confidence. Financial institutions that later wanted to participate in the 

CPP, a program for “healthy” banks, were required to submit applications for 

CPP funding through their primary federal regulators. These applications were 

subjected to a more formal review process before funding approval by 

Treasury. 

Citing substantial losses incurred by Merrill Lynch in the fourth quarter, Bank 

of America’s Chief Executive Officer, Kenneth Lewis, informed Treasury and 

Federal Reserve officials that he was considering terminating the planned 

acquisition of Merrill Lynch. Federal officials believed that this action was ill 

advised, would likely be unsuccessful, and could potentially destabilize Merrill 

Lynch, Bank of America, and the broader financial markets. Bank of America 

subsequently agreed with this view and completed the acquisition; Treasury 

then provided Bank of America with an additional $20 billion TARP 

investment and announced asset guarantees related to $118 billion of troubled 

assets. 

Questions have emerged about the potential acquisition termination and 

whether federal officials had put pressure on Bank of America to complete the 

transaction without disclosing Merrill Lynch losses. This report addresses these 

issues from the perspective of the principals involved and ultimately concludes 

that federal officials acted based on their concerns for the financial markets as a 

whole and provided additional government assistance to ensure that Bank of 

America remained a viable financial institution after the acquisition. 

Table of Contents 

Introduction 1 

Rapidly Deteriorating Economic Conditions Led to the Capital 

Purchase Program 7 

Initial CPP Funds Provided as an Emergency Measure To Stabilize 

the Markets 14 

Officials Believed that Terminating the Merger with Merrill Lynch 

Could Undermine the Viability of Bank of America 

and Destabilize the Financial System 23 

Conclusions and Lesson Learned 30 

Management Comments and Audit Response 32 

Appendices 

A. Scope and Methodology 33 

B. Measures To Stabilize Financial Markets before EESA Passage 35 

C. Net Income Gains and Losses from 2007 to 2009 of Seven U.S. 

 Financial Institutions Receiving CPP Funds 37 

D. Selected U.S. Incorporated Bank Holding Companies by Total Assets 39 

 E. Key Events in the Bank of America and Merrill Lynch Merger 40 

F. Definitions of Acronyms 41 

G. Audit Team Members 42 

H. Management Comments from the Federal Reserve Board 43 

I. Management Comments from Treasury 45 
1 

Emergency Capital Injections Provided To Support 

Bank of America, Other Major Banks, and the U.S. 

Financial System 

SIGTARP REPORT 10-001 October 5, 2009 

Introduction 

From about July 2007 through August 2008, financial markets were hit with news of large losses 

at major financial institutions resulting from subprime lending and the derivatives markets.1 The 

situation worsened in September 2008 when multiple failures and deepening concerns about 

other institutions resulted in historic turmoil in financial markets. The Emergency Economic 

Stabilization Act of 2008 (“EESA”) provided the Secretary of the Treasury with the authority 

and facilities necessary to restore the liquidity and stability of the U.S. financial system. EESA 

authorized up to $700 billion to stabilize the financial system under the Troubled Asset Relief 

Program (“TARP”). 

• One of the first uses of TARP funds was providing capital to nine major financial 

institutions as part of the Capital Purchase Program (“CPP”), a program designed to 

infuse capital into “healthy” banks. The development of the program was based on the 

belief that the federal government needed to make a significant show of support to the 

troubled financial markets. 

• These nine institutions, which held more than $11 trillion in banking assets 

(approximately 75 percent of all assets held by U.S-owned banks as of June 30, 2008), 

received $125 billion, or about 61 percent of the total CPP funds that Treasury has 

provided to participating banks. Through September 11, 2009, over 670 banks have 

received a total of $204.55 billion under the CPP. 

• One of the first nine institutions to receive CPP funds was Bank of America Corporation 

(“Bank of America”), which prior to the CPP infusion, had agreed to purchase Merrill 

Lynch & Co., Inc. (“Merrill Lynch”), a company in serious financial difficulty. 

• Three months later, after the banking industry experienced one of the most financially 

devastating earnings quarters in recent history, including dramatic losses to Merrill 

Lynch, which was being acquired by Bank of America. This precipitated an additional 

$20 billion in assistance to Bank of America as part of the Targeted Investment 

Program (“TIP”). This program allows Treasury to make targeted additional 

investments in financial institutions beyond what was provided under the CPP if a loss of 

confidence would threaten other similar institutions, the broader financial markets, or the 

economy as a whole. 

 

1

 A derivative is a financial instrument whose value is based on (“derived from”) a different underlying asset, 

indicator, or financial instrument. 
2 

• At the same time that TIP funds were provided, Treasury, the Federal Deposit Insurance 

Corporation (“FDIC”), and the Federal Reserve had also agreed to share losses with Bank 

of America on a designated pool of assets valued at approximately $118 billion through 

the Asset Guarantee Program (“AGP”). This program provides guarantees for assets 

held by systemically significant financial institutions that face a high risk of losing 

market confidence due in large part to a portfolio of distressed or illiquid assets.2 (As 

discussed later in the report, Bank of America has withdrawn its request for AGP 

assistance.) 

Together, this assistance to Bank of America totaled $45 billion,3

 making Bank of America one 

of the largest recipients of TARP funds. 

Background 

In recent years, the dramatic downturn in the U.S. housing market led to an abrupt decline in the 

price of financial assets associated with housing. The value of mortgage-backed securities, 

particularly those based on subprime loans,4

 declined precipitously as the financial crisis 

unfolded and the housing boom ended. As loan delinquencies increased and housing prices 

decreased, mortgage-backed securities (bundles of individual mortgages) began losing value, and 

the associated losses at financial institutions resulted in serious financial difficulties. Some 

financial institutions—ranging from government-sponsored enterprises, such as the Federal 

National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage 

Corporation (“Freddie Mac”), to the largest of the Wall Street firms—were left holding “toxic” 

mortgages and/or securities that were increasingly difficult to value, illiquid, and potentially had 

little worth. Some institutions found themselves so exposed that they were threatened with 

failure, and some failed, because they were unable to raise needed capital as the value of their 

portfolios declined. 

The declining value of mortgage-backed securities undermined the confidence of investors; 

many sought to cut ties with struggling financial institutions holding these securities. As 2008 

progressed, this led to an escalating crisis in the financial markets. By late summer 2008, the 

ramifications of the financial crisis included the failure of several significant financial 

institutions, increased losses of individual savings, diminished corporate investments, and further 

tightening of credit. All of this combined to exacerbate the emerging global economic 

slowdown. 

 

2

 Illiquid assets cannot be quickly converted to cash. 

3

 This figure excludes the $7.5 billion loan guarantee that would have been available from Treasury, if required, 

under the AGP. 

4

 Subprime loans are designed for borrowers who do not qualify for prime mortgages, such as borrowers who have 

one or more of the following characteristics: weakened credit histories typically characterized by payment 

delinquencies, previous charge-offs, judgments, or bankruptcies; low credit scores; high debt-burden ratios; or high 

loan-to-value ratios. These loans were often not supported by full documentation and carried less favorable terms to 

the borrower, such as higher interest rates. Many of these loans were bundled into securities that were sold to 

investors, including banks, hedge funds, insurance companies, and retirement fund systems. 
3 

Financial Failures from July 2007 to July 2008 

One of the first major failures of a financial institution caused by the rapid deterioration in the 

performance of subprime mortgages was the large investment bank5 Bear Stearns Companies 

(“Bear Stearns”). On July 31, 2007, Bear Stearns placed into bankruptcy two funds6

 that had 

heavily invested in mortgage-backed securities. The securities in these two funds were estimated 

to have lost 28 percent of their value since the beginning of that year. 

Although the funds held only about $600 million in investor capital around that time, their 

liquidation caused alarm for at least two reasons. First, the mortgage-backed securities had been 

originally rated as safe and low-risk by the rating agencies, and their substantial loss in value 

over a very short period raised doubts about the ratings of all similar securities. The liquidation 

suggested that other holders of similar subprime mortgage-backed securities might also 

experience similar losses. Thus, investors became less willing to invest with any fund or 

financial institution that held subprime mortgage-backed securities. Second, Bear Stearns funds 

had borrowed heavily to invest in these funds; this meant that losses in the funds posed problems 

for their investors, creditors, and counterparties.7

 Moreover, because these funds do not disclose 

their sources of funding, there was uncertainty about which institutions were exposed to credit 

risk from funds tied to subprime mortgages in the market. On August 9, 2007, soon after Bear 

Stearns liquidated its two funds, BNP Paribas (France’s largest bank) halted redemptions8

 on 

three of its funds that held mortgage-backed securities. 

From mid-2007 to early 2008, the increased financial strains led to a liquidity crisis9

 at Bear 

Stearns: in the fourth quarter of 2007, Bear Stearns reported the first quarterly loss in its history. 

By March 2008, other large financial institutions had stopped doing business with Bear Stearns, 

and it became evident that absent some form of assistance, Bear Stearns would fail. In a deal 

brokered by the Federal Reserve Bank of New York (“FRBNY”), JPMorgan Chase & Co. 

(“JPMorgan Chase”) purchased Bear Stearns on March 16, 2008, for a fraction of what the bank 

was worth a year earlier. 

The liquidity crisis had also affected other financial institutions. Countrywide Mortgage (the 

nation’s largest mortgage lender at the end of 2006) had also experienced liquidity problems 

caused by the decline of the secondary market for mortgage-backed securities. The company 

was later acquired by Bank of America. Following the acquisition of Countrywide Mortgage, 

IndyMac Bank (the nation’s ninth-largest mortgage servicer at the time) failed as a result of 

tighter credit, decreasing home prices, and rising foreclosures. The bank had relied heavily on 

 

5

 An investment bank performs a variety of services, including underwriting (purchasing and distributing securities), 

acting as the intermediary between an issuer of securities and the investing public, facilitating mergers and other 

corporate reorganizations, and acting as brokers for institutional clients. 

6

 These funds were subsequently liquidated. On July18, 2007, Bear Stearns had circulated a letter to shareholders of 

these funds, which was promptly obtained and widely distributed by the press, indicating that the value of their 

shares in these funds had been essentially wiped out. Thus, the bankruptcy filing was widely expected. 7

 A counterparty is the other party that participates in a financial transaction. Every transaction must have a 

counterparty for the transaction to go through. More specifically, every buyer of an asset must be paired with a 

seller who is willing to sell and vice versa. 

8

 A redemption is the act of an investor reclaiming his or her money. 

9

 A liquidity crisis occurs when an institution lacks the cash required to pay for day-to-day operations, or meet its 

debt obligations when they are due, causing it to default. 
4 

risky loans made to home buyers with little or no evidence of income or assets. While home 

prices climbed, these loans posed few problems for IndyMac. However, when the housing 

bubble burst and prices began to fall, losses at IndyMac began to rise. When the FDIC seized the 

company on July 11, 2008, IndyMac had experienced a run on its deposits. IndyMac’s failure 

was the fourth-largest bank failure in U.S. history and the largest since 1988. 

Initial Steps Taken To Address the Financial Crisis Proved 

Insufficient 

As the financial market strains continued, the Federal Reserve, Treasury, and other government 

entities took significant steps to address the liquidity crisis and other underlying causes of the 

financial crisis. However, these actions proved insufficient to stem the economic deterioration. 

Some key measures taken prior to the EESA legislation are discussed below. For a more 

comprehensive list of measures taken by Treasury and federal regulators, see Appendix B. 

In the period leading up to EESA, the Federal Reserve implemented several measures to increase 

the liquidity in the financial system, including: 

1. Lowering the target level of the federal funds rate—the interest rate at which banks 

lend their balances held at the Federal Reserve, usually overnight, to other depository 

institutions—seven times from August 2007 to April 2008, including two cuts of 1.25 

percentage points in January 2008. The federal funds target rate decreased from 5.25 

percent in August 2007 to 2.0 percent in April 2008. More recently, as of July 31, 2009, 

the target rate was 0 to .25 percent. 

2. Lowering the primary credit rate—the rate at which eligible institutions can borrow 

money from the Federal Reserve, usually on a short-term basis—from 6.25 percent in 

August 2007 to 2.25 percent in April 2008. It was at .50 percent as of August 20, 2009. 

In addition, the Federal Reserve increased the maximum maturity of such loans. 

3. Introducing the Term Auction Facility on December 12, 2007, as a means of offering 

short-term liquidity to depository institutions. The Term Auction Facility permitted 

depository institutions to anonymously bid to receive funds secured by a wide variety of 

collateral for a term of 28 days. The maximum term of such funding was later extended 

to 84 days. 

4. Announcing the Term Securities Lending Facility on March 11, 2008, under which the 

Federal Reserve lends Treasury securities to primary dealers10 secured by a range of 

collateral, initially for a term of 28 days. The maximum term was later extended to 84 

days. 

5. Facilitating the orderly acquisition of Bear Stearns by providing financing to 

JPMorgan Chase to help buy the investment bank and limit the downside risks of a 

portfolio of Bear Stearns assets. 

 

10 Primary dealers are a group of securities broker-dealers that trade in U.S. Government securities with the Federal 

Reserve Bank of New York for the purpose of carrying out open market operations. As of July 27, 2009, there were 

18 primary dealers. 
5 

Along with Treasury and the Federal Reserve, other government agencies adopted measures 

designed to stabilize the financial markets prior to the enactment of EESA.11 In October 2007, 

for example, Treasury and the Department of Housing and Urban Development announced the 

HOPE NOW initiative to stem the rising number of home foreclosures. HOPE NOW is an 

alliance between counselors, mortgage companies, investors, and other mortgage-market 

participants that works with at-risk homeowners to help prevent foreclosures.12 In July 2008, the 

Securities and Exchange Commission (“SEC”) issued an emergency order limiting the short 

selling of the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and 

investment banks. The SEC temporarily extended for one month the ban to include the short sale 

of all stocks in the financial sector in September 2008. 

In response to the continuing and growing economic crisis, the U.S. and other governments 

sought to implement even more aggressive plans to address the stresses on their financial 

institutions and the turmoil in the global financial markets. The governments of the United 

Kingdom, Germany, France, Canada, Ireland, and Sweden either provided liquidity and capital 

injections to their institutions or prohibited the short selling of financial stocks of several 

institutions. 

On September 20, 2008, then-Secretary of the Treasury Henry Paulson submitted to Congress a 

three-page proposal, “Legislative Proposal for Treasury Authority To Purchase MortgageRelated Assets.” The proposal would have authorized Treasury to purchase, manage, and sell 

certain mortgage-related assets. Although this initial proposal was not accepted by Congress, it 

prompted legislative action that resulted in EESA, which was enacted on October 3, 2008. 

However, as discussed further in this report, continued economic deterioration shortly after 

EESA was enacted led to a change in strategy over the use of TARP funds. 

Objectives 

Overall, this report completed by SIGTARP’s Audit Division, examines the basis for selecting 

Bank of America and the other eight financial institutions to receive TARP capital investments. 

Specifically, it addresses: 

• the significant economic events in September 2008 that led Treasury to inject capital into 

the financial system, 

• the rationale and criteria used to select Bank of America and the other eight financial 

institutions to receive CPP funds as compared to those used to select subsequent banks 

for CPP participation, and 

• the basis for the decision by Treasury and federal regulators to provide Bank of America 

with additional financial assistance following the acquisition of Merrill Lynch, and 

federal efforts to forestall Bank of America from terminating the planned Merrill Lynch 

acquisition. 

 

11 Approximately 50 initiatives or programs have been created by various federal agencies since 2007. 12 By November 2008, the alliance claimed that the mortgage industry had prevented nearly 2.7 million foreclosures 

since July 2007. 
6 

For a discussion of the audit scope and methodology, see Appendix A. For a list of key 

measures taken by the government to stabilize the financial markets before the EESA legislation, 

see Appendix B. For data on assets of the top U.S. financial institutions, see Appendix C. For a 

summary of the net gains and losses of major financial institutions from 2007 to 2009, see 

Appendix D. For a list of key events related to the merger of Bank of America and Merrill 

Lynch, see Appendix E. For definitions of the acronyms used in this report, see Appendix F. 

For a list of team members who contributed to the audit, see Appendix G. For copies of 

management comments, see Appendices H and I. 

Numerous issues have arisen in the aftermath of the merger of Bank of America and Merrill 

Lynch. Some of these issues are the focus of ongoing investigations, including by SIGTARP’s 

Investigations Division, and are, therefore, not discussed in this report. 
7 

Rapidly Deteriorating Economic Conditions Led 

to the Capital Purchase Program 

This section addresses the significant destabilizing events that occurred in September 2008 that 

led federal officials to realize that their attempts to minimize damages to the financial system had 

not worked and that the system needed extraordinary government support. For example, in the 

first week of September, the mortgage firms Fannie Mae and Freddie Mac were put into 

conservatorship; by the second week of September, three major Wall Street financial institutions 

were bankrupt or near bankruptcy. These events and other September failures caused the 

freezing of interbank short-term lending that is critical to the liquidity of financial institutions. 

Believing that time was of the essence, the Secretary of the Treasury, the Chairman of the Board 

of Governors of the Federal Reserve System (“Federal Reserve”), and other federal officials 

decided that a dramatic infusion of capital into major banks, rather than the purchase of illiquid 

mortgage-related assets, would best demonstrate the U.S. government’s support for the financial 

markets and restore confidence to the system. They hoped this would free credit and improve 

the condition of national and international financial systems. 

Major U.S. Financial Strains in September 2008 

In September 2008, a succession of major U.S. financial institutions either failed or experienced 

intense pressure that would require federal assistance to save them from collapse. These events 

are depicted in Figure 1 and include: 

• The Federal Housing Finance Agency, which was created two months earlier, placed 

under conservatorship Fannie Mae and Freddie Mac, the two government-sponsored 

enterprises that are primary participants in the secondary mortgage market.13

• Lehman Brothers filed for bankruptcy. 

• The FRBNY provided an $85 billion credit facility to American International Group 

(“AIG”) to prevent its failure. 

In that same month, Merrill Lynch, which also was experiencing large financial losses, agreed to 

merge with Bank of America; the FDIC took over Washington Mutual Inc. (“WaMu”) in what 

was to be the largest depository institution failure in U.S. history; and Citigroup announced its 

purchase of Wachovia Corp (“Wachovia”) although it was subsequently purchased by Wells 

Fargo & Company (“Wells Fargo”). Although they did not fail, the large investment firms of 

Goldman Sachs Group, Inc. (“Goldman Sachs”) and Morgan Stanley reportedly also came under 

pressure as a result of the credit crisis and converted to bank holding companies in September 

2008. The conversions could allow them greater access to more stable sources of funding—

namely, deposits from ordinary people and businesses, and made them eligible for certain 

government programs designed to address the liquidity crisis. 

 

13 In the secondary mortgage market, mortgage loans and servicing rights are bought and sold between mortgage 

originators, mortgage aggregators (including the housing-related government-sponsored enterprises), and investors. 
8 

Figure 1: Major Financial Events in September 2008 

Source: SIGTARP analysis of data from the FRBNY 

Prior to being placed under federal conservatorship on September 7, 2008, Fannie Mae and 

Freddie Mac had lost a combined total of more than $5.46 billion as a result of the turmoil in the 

housing and credit markets in the first six months of 2008. These two government-sponsored 

enterprises play a central role in mortgage finance: they purchased about 80 percent of all new 

home mortgages in the United States in 2008, and their combined investment portfolios held 

mortgage assets (loans and mortgage-backed securities) valued at $1.5 trillion as of June 30, 

2008. Amid worries that the capital of Fannie Mae and Freddie Mac would be insufficient to 

absorb mounting losses on their mortgage portfolios, their stock prices began to decline 

significantly in July 2008, and the possibility emerged that investors would not extend credit to 

the two entities. From the end of 2007 to August 1, 2008, Fannie Mae’s stock lost 72 percent of 

its value, and the value of Freddie Mac’s stock fell by 77 percent. In July 2008, the Federal 

Reserve authorized lending to Fannie Mae and Freddie Mac at the primary credit rate, and 

Treasury temporarily increased its lines of credit to both entities. Nevertheless, losses continued 

to mount over the summer, and the Federal Housing Finance Authority14 subsequently placed 

them under conservatorship. 

On September 10, 2008, Lehman Brothers announced that it had lost $3.9 billion in the third 

quarter. Two days later, rating agencies Moody’s Investors Service and Standard & Poor’s 

threatened to downgrade the firm unless it could find a merger partner. At that time, Lehman 

Brothers executives were in talks with Bank of America and Barclays PLC regarding a possible 

sale of the company, but both banks eventually declined to purchase the firm. On Friday, 

September 12, 2008, then-FRBNY President Timothy Geithner and then-Secretary of the 

Treasury Henry Paulson summoned executives from major financial firms to the FRBNY to 

discuss a rescue plan for Lehman Brothers. One executive at the meeting told SIGTARP15 that 

 

14 The Federal Housing Finance Agency is an independent federal agency created in July 2008 as the successor 

regulatory agency resulting from the statutory merger of the Federal Housing Finance Board and the Office of 

Federal Housing Enterprise Oversight. The new agency absorbed the powers and regulatory authority of both 

entities, with expanded legal and regulatory authority—including the ability to place Fannie Mae and Freddie Mac 

under conservatorship. 

15 For this report, federal officials and bank executives were interviewed by SIGTARP Audit Division. 

Sep 2 4 6 8 10 12 14 16 18 20 22 24 26 28

10-Sep

Lehman 

Brothers 

announces 

$3.9 billion 

losses in 

third quarter 

12-Sep

Moody’s and 

Standard & 

Poor’s threaten 

to downgrade 

Lehman 

Brothers 

7-Sep

Fannie Mae & 

Freddie Mac 

placed under 

federal 

conservatorship 

15-Sep

Lehman Brothers 

files for 

bankruptcy 

15-Sep

AIG debt 

downgraded by 

three major ratings 

agencies 

15-Sep

Bank of America 

announces plans to 

buy Merrill Lynch 

16-Sep

AIG receives 

$85billion 

government 

loan 

16-Sep

a major 

money 

market fund 

“breaks the 

buck” 

25-Sep

WaMu 

closed by 

regulator 29-Sep

Citigroup 

announces plans 

to buy 

Wachovia, but it 

was eventually 

sold to Wells 

Fargo 

21-Sep

Goldman 

Sachs and 

Morgan 

Stanley 

approved 

to become 

bank 

holding 

companies 
9 

President Geithner and Secretary Paulson stated that any plan must be “an industry solution” and 

that the government would not use taxpayer funds to help Lehman Brothers. The executive told 

SIGTARP that the group determined that sufficient funds could not be raised to rescue Lehman 

Brothers. Absent the funding, the group determined that Lehman Brothers would have to file for 

bankruptcy. Lehman Brothers, which had operated for 158 years, filed for bankruptcy on 

September 15, 2008, because it was unable to find a merger partner or obtain government 

assistance. Secretary Paulson, Federal Reserve Chairman Bernanke and other senior federal 

officials informed SIGTARP that, because Lehman Brothers did not meet minimum collateral 

and equity criteria, the Federal Reserve was unable to assist the institution in the manner in 

which it facilitated the sale of Bear Stearns to JPMorgan Chase. To many market observers, the 

failure of Lehman Brothers was particularly detrimental to market confidence because it 

demonstrated that the government might not be willing to rescue large financial institutions. 

Largely as a result of its exposure to Lehman Brothers, the Reserve Primary Fund dipped below 

$1.00 per share, thereby “breaking the buck,” 16 which further aggravated the credit crisis. 

Money market funds are considered among the safest investments; it is a rare and significant 

event when their per share value drops below $1.00. When Lehman Brothers filed for 

bankruptcy, the Reserve Primary Fund was forced to write off approximately $785 million in 

Lehman Brothers debt that it held. The resulting market anxiety contributed to a run on the 

fund,17 with many investors attempting to withdraw their money. In addition, large-scale 

redemptions caused other money market mutual fund companies to hoard cash so that they could 

be able to pay investors back, rather than investing in term funding markets, such as those for 

commercial paper18 and certificates of deposit. Consequently, banks and corporations that sell 

these securities were cut off from a fundamental source of short-term funding and subsequently 

faced their own difficulties meeting operating expenses. 

On September 16, 2008, one day after Lehman Brothers filed for bankruptcy, the Federal 

Reserve authorized FRBNY to establish an $85 billion secured line of credit to ensure that AIG 

could meet its obligations. The FRBNY loan was secured by the stock of AIG-owned 

subsidiaries and required AIG to provide warrants that, if exercised, would give the government 

a 79.9 percent equity stake in the company, making it the largest government bailout of a private 

company in U.S. history.19 The Federal Reserve was concerned that a bankruptcy of AIG would 

have significant consequences for the broader economy because it was a central player in the 

financial markets. Among other things, AIG sold credit protection, or “insurance,” in the form 

of credit default swaps, 20 to other financial institutions that held asset-backed securities (which 

include mortgage-backed securities). Absent government support, AIG did not have enough 

 

16 The Reserve Primary Fund was the oldest money market fund in the United States. When the fund falls below 

$1.00 per share, it is known as “breaking the buck.” 

17 Approximately 50 percent of all funds were withdrawn from the Primary Fund between September 15 and 

October 30, 2008, or about $26 billion. 

18 Commercial paper is a type of note issued to cover short-term obligations, such as operating and payroll expenses. 

19 Fannie Mae and Freddie Mac are government-sponsored enterprises. They are privately owned, but publicly 

chartered. 

20 A credit default swap is a derivative contract between two counterparties. The buyer makes periodic payments to 

the seller and, in return, receives a payoff if the underlying financial instrument defaults. 
10 

resources to meet its obligations to other financial institutions under transactions in these 

instruments.21 

Cost of Interbank Borrowing Sharply Increases 

The cumulative effects of the failures of these major financial institutions caused general 

uncertainty about the financial condition, the solvency of some financial entities, and the likely 

liquidity needs of other firms going forward. The result was that lending in the interbank 

markets22 ceased to function effectively and the cost of term borrowing sharply increased in 

September 2008. Access to loans through the interbank market, usually on a short-term basis, is 

essential for financial institutions to fund their positions and manage their liquidity. 

A key measure of financial stress and the availability of credit is the difference (or “spread”) 

between two short-term interest rates—the London Interbank Offered Rate (“LIBOR”) and the 

Overnight Index Swap (“OIS”) rate. The difference reflects what banks believe is the risk of 

default associated with lending to other banks and the uncertainties associated with the supply 

and demand for funding.23 Prior to the start of the financial crisis, in April 2007, the one-month 

LIBOR-OIS spread was between six and seven basis points. According to the then-Acting 

Assistant Secretary of Financial Stability, Treasury was watching closely this measure. As 

shown in Figure 2, the spread increased in August 2007 after Bear Stearns liquidated and BNP 

Paribas froze funds that were tied to subprime mortgages. It increased again in response to the 

strains at Countrywide Mortgage and the failure of Bear Stearns. The spread spiked dramatically 

in the middle of September 2008 when the series of destabilizing economic events occurred; it 

increased from 54 to 142 basis points after Lehman Brothers filed for bankruptcy and AIG 

received $85 billion from the FRBNY. The spread reached a historical high of 341 basis points 

on October 13, 2008, signaling a severe disruption to the interbank market. Since reaching this 

high in mid-October, the LIBOR-OIS spread has fallen sharply, indicating that the credit 

markets, although still not at normal levels, are now working better than before the government 

capital injections. 

 

21 SIGTARP is completing a separate review that examines AIG’s payments to its counterparties. That report is 

expected to be released in within the next 30 days. 

22 Banks borrow and lend money in the interbank lending market to manage liquidity and to meet requirements 

placed on them. (Banks are required to hold specific amounts of reserve balance against some types of deposit 

accounts). A bank that wishes to augment its reserves can borrow money in the interbank market to do so. Banks 

that have a higher level of reserves than they desire can lend money in the interbank market, receiving interest on the 

loan. Without the ability to borrow funds readily, banks are more concerned about retaining cash, and so are more 

reluctant to lend.

23 The difference between these two rates is an indicator of counterparty credit risk and liquidity pressures, with a 

lower spread suggesting diminished concerns about credit risk. The spread is measured in basis points—a unit equal 

to 1/100th of a percentage point. 
11 

Figure 2: Significant Economic Events and Corresponding LIBOR-OIS Spread 

Source: SIGTARP analysis of data from the Federal Reserve System and SEC 

Initial Plan for the Use of TARP Changes in Response to Severe 

Stress in the Financial Markets 

Following a week of severe stress in financial markets that saw the failure of Lehman Brothers, 

the government bailout of AIG, and the virtual freezing of the credit markets, Treasury and the 

Federal Reserve determined that a more significant, broadly based, and systemic approach was 

needed to promote stability, prevent additional disruption to the financial markets and banking 

system, and avoid the risk of a financial market collapse. On September 20, 2008, thenSecretary Paulson submitted to Congress a proposal that would have authorized Treasury to 

purchase up to $700 billion in mortgage-related securities, among other things. Congress did not 

enact this initial proposal, but a series of counterproposals that evolved into EESA followed over 

the next two weeks, as noted in Figure 3. On October 3, 2008, EESA was signed into law as P.L. 

110-343. 

0

50

100

150

200

250

300

350

400

Apr‐07

May‐07

Jun‐07

Jul‐07

Aug‐07

Sep‐07

Oct‐07

Nov‐07

Dec‐07

Jan‐08

Feb‐08

Mar‐08

Apr‐08

May‐08

Jun‐08

Jul‐08

Aug‐08

Sep‐08

Oct‐08

Nov‐08

Dec‐08

Jan‐09

Feb‐09

Mar‐09

Apr‐09

Basis points

31 Jul

Bear Stearns 

liquidates 2 

funds tied to 

subprime 

mortgages 

11 Jan 

Bank of America 

announces plans to 

buy Countrywide 

16 Sep

AIG receives loan 

from Federal Reserve 

16 Sep 

Reserve Primary Fund 

“breaks the buck” 

9 Aug

BNP Paribas 

freezes 3 funds 

after inability 

to value 

subprime 

mortgagebased assets 11 Jul

IndyMac Bank fails

16 Mar

JPMorgan 

buys Bear 

7 Sep

Fannie Mae and 

Freddie Mac placed 

under conservatorship 

15 Sep

Bank of America 

announces plans to 

buy Merrill Lynch 

Lehman Brothers files 

for bankruptcy 3 Oct 

Wells Fargo 

announces 

plans to buy 

Wachovia

25 Sep

WaMu fails 
12 

Figure 3: Legislative Process Leading to the Passage of EESA 

Source: SIGTARP 

The original legislative proposal would have limited the Secretary’s ability to use TARP funds to 

the purchase of mortgage-related assets, but EESA gave the Secretary of the Treasury broad 

latitude to determine both the type of financial instrument purchased and the institution from 

which it would be bought. As the financial and credit markets continued to rapidly deteriorate, 

Treasury’s initial strategy evolved from purchasing toxic troubled assets to injecting capital 

directly into financial institutions to encourage them to build capital, increase the flow of 

financing to businesses and consumers, and support the economy. In explaining the change in 

strategy, which was implemented within two weeks of EESA’s enactment, former Secretary 

Paulson said that, when market conditions had worsened considerably, it was clear that Treasury 

needed to act quickly and forcefully, and that purchasing troubled assets—the initial focus—

would take time to implement and would not be sufficient given the severity of the problem. In 

consultation with the Federal Reserve, he believed that the most timely and effective step to 

improve credit market conditions was to strengthen bank balance sheets quickly through direct 

purchases of equity in banks. Two bank executives whom SIGTARP interviewed similarly 

concluded that Treasury may not have had time to value properly the troubled assets and that the 

$700 billion provided by EESA was not, in any event, sufficient to buy the troubled assets on the 

financial institutions’ balance sheets. Chairman Bernanke also stated to SIGTARP that a fire 

sale of these assets pursuant to such an asset purchase would have reduced their value.24 

Although he believed that the plan to buy troubled assets was appropriate, Chairman Bernanke 

noted that the time factor prevented the plan from being implemented, stating that it could be a 

months-long process, if not longer. As a result, Treasury announced the CPP on October 14, 

2008, to infuse capital directly into banks. 

In addition to Treasury’s CPP, the FDIC and Federal Reserve also announced new programs on 

October 14, 2008 to strengthen market stability, improve the strength of financial institutions, 

and enhance market liquidity. The FDIC created the Temporary Liquidity Guarantee Program in 

which it guaranteed newly issued senior unsecured debt of all FDIC-insured institutions and their 

 

24 In a fire sale, an asset holder must sell the asset very quickly, potentially depressing the price of the asset 

significantly in the process. 
13 

holding companies, and provided full coverage of none-interest bearing deposit transaction 

accounts, regardless of the dollar amount. Under the plan, certain newly issued unsecured debt 

issued on or before June 30, 2009, would be fully protected in the event the issuing institution 

subsequently fails, or its holding company files for bankruptcy. Coverage would be limited to 

June 30, 2012, even if the maturity exceeds that date. The Federal Reserve announced further 

details on its Commercial Paper Funding Facility, created a week earlier, that would provide a 

liquidity backstop to U.S. issuers of commercial paper by purchasing commercial paper of three 

month maturity from high-quality issuers. 
14 

Initial CPP Funds Provided as an Emergency 

Measure To Stabilize the Markets 

This section discusses the rationale and criteria used to select the initial nine institutions 

compared to those used to select subsequent institutions. Because of their perceived importance 

to the market and financial system, the U.S. government provided $125 billion to Bank of 

America and eight other financial institutions—half of the TARP funds available at that time—in 

hopes of expanding the flow of credit and promoting economic growth. Government officials 

strongly urged the nine institutions to accept these monies as a group, irrespective of whether 

individual institutions felt that they required assistance, in the belief that it was crucial to restore 

public confidence in the banking system. The amount of funding each financial institution 

received was largely formula-driven and based on risk-weighted assets. Treasury required later 

CPP applicants to apply through a review and approval process for the remaining funds that 

placed an emphasis on the strength and viability of each applicant and not on its potential use of 

funds. Although CPP is designed to invest capital in “healthy” viable institutions, the strength of 

the initial nine participants varied: two of them later required additional government assistance, 

and one was in the process of being acquired by another. 

Initial Institutions Selected Based on Their Market Activities 

and Collective Importance to the Financial System 

To demonstrate federal government support to the financial system and promote consumer and 

investor confidence, Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, Goldman 

Sachs, Morgan Stanley, Merrill Lynch, State Street Corporation (“State Street”), and the Bank of 

New York Mellon were selected to receive the first government capital injections based on the 

types of services they provide to the consumers and businesses and their collective importance to 

the financial system, according to Treasury officials and federal regulators. FRBNY staffdeveloped briefing documents obtained by SIGTARP indicate that FRBNY officials played a 

key role in developing the capital injections program and selecting the nine initial institutions to 

receive CPP funds. These briefings laid out the rationale for the need to inject quickly a large 

amount of capital into the U.S. banking system, the different components of the plan, and the 

selection of the participating banks including the initial nine. Former Secretary Paulson told 

SIGTARP that he relied on then-FRBNY President Geithner to help develop the plan because he 

was viewed as the most skilled person to provide options and develop processes to help stabilize 

the financial markets. Other federal regulators agreed that the institutional selections were 

logical and viewed them as “systemically important”25 because of the types of services they 

provide, their size, and their interdependence with each other and the broader economy. As 

 

25 The term “systemically significant institutions,” as used by Treasury and federal regulators, generally refers to 

those institutions whose failure would impose significant losses on creditors and counterparties, call into question 

the financial strength of other similarly situated financial institutions, disrupt financial markets, raise borrowing 

costs for households and businesses, reduce household wealth, and have an adverse effect on the economy as a 

whole. 
15 

such, their participation in the CPP was considered central to the government’s solution to 

stabilize the financial markets. 

According to Treasury officials and federal regulators, the nine institutions represented the 

nation’s leaders in the commercial and investment banking sector, as well as the U.S. custodial 

and securities processing system. These institutions include four large commercial banks, three 

investment banks, and two custodial and processing institutions: 

• The four large commercial banks—Bank of America, Citigroup, JPMorgan Chase, and 

Wells Fargo—are “traditional” banks. They accept deposits, make commercial and 

industrial loans, and perform other banking services for the public. 

• The three investment banks—Goldman Sachs, Morgan Stanley, and Merrill Lynch—are 

largely financial intermediaries. They perform a variety of services, including 

underwriting (purchasing and distributing securities), acting as the intermediary between 

an issuer of securities and the investing public, facilitating mergers and other corporate 

reorganizations, and acting as brokers for institutional clients. 

• State Street and the Bank of New York Mellon are also central to the financial system 

because they provide custodial services, such as securities processing and settlement 

services for financial transactions. 

Together, these nine institutions provide broad financial services and engage in key activities of 

the U.S. financial system. 

Another criterion considered in the selection was the size of the institutions. The nine selected 

institutions together held more than $11 trillion dollars in banking assets—approximately 75 

percent of all assets held by U.S-owned banks as of June 30, 2008. By September 30, 2008, 

Bank of America was the third-largest bank holding company in the country, with nearly $1.84 

trillion in consolidated assets (see Table 1). The nation’s first- and second-largest bank holding 

companies by asset value as of September 30, 2008, were JPMorgan Chase ($2.25 trillion) and 

Citigroup ($2.05 trillion). Although behind Goldman Sachs and Morgan Stanley in total assets, 

Merrill Lynch was the nation’s sixth-largest financial institution at that time, with reported assets 

of nearly $876 billion. Wachovia Corporation, which would be acquired by Wells Fargo, 

reported about $761 billion in assets. With the acquisition of Merrill Lynch, Bank of America 

became the nation’s largest bank holding company, with about $2.32 trillion in assets as of 

March 31, 2009 (see Appendix D). 
16 

Table 1: Consolidated Assets of Top U.S. Financial Institutions for Quarter 

Ending September 30, 2008 (in $ billion) 

Rank Name Asset Value Ending in 9/30/08b

1 JPMorgan Chase & Co $2,251.47 

2 Citigroup Inc. 2,050.13 

3 Bank of America Corporation 1,836.45 

4 Goldman Sachs Group, Inc.a 1,081.77 

5 Morgan Stanley* 987.40 

6 Merrill Lynch & Company* 875.78 

7 Wachovia Corporation 760.56 

8 Wells Fargo & Company 622.36 

9 State Street Corporation 286.71 

10 The Bank of New York Mellon Corporation 267.64 

Total $11,020.27 

Source: The Federal Reserve and the SEC 

Note: a

Data for Goldman Sachs is for the quarter ending August 29, 2008; data for Morgan Stanley is for the quarter ending 

August 31, 2008; data for Merrill Lynch & Company is for the quarter ending September 29, 2008. 

b

Numbers are affected by rounding 

Various federal officials and bank executives noted that these nine systemically important 

institutions are also highly interdependent and interconnected with each other. Some of the 

institutions are counterparties to each other, such that a risk of one institution failing to live up to 

its contractual obligations would cause financial problems, if not failure, for another. Bank of 

America and Merrill Lynch had counterparty exposures with many financial institutions, 

including several of the nine banks in the initial group that received CPP funds. In addition, two 

bank executives SIGTARP interviewed explained that State Street and the Bank of New York 

Mellon were included in the initial group of nine institutions because they were ‘infrastructure’ 

institutions that provided securities processing and settlement services for other financial 

transactions. According to the executive, when the operations of then-Bank of New York were 

temporarily disrupted as a result of the terrorist attacks on September 11, 2001, it had significant 

effects on the functioning of other financial institutions. 

According to government officials interviewed by SIGTARP, the relative health of the first nine 

institutions selected to receive CPP funds was not a primary factor in the institutions selection, 

though then-Secretary Paulson and Chairman Bernanke made several references to the health of 

the nine institutions at the time. In an October 14, 2008, statement, for example, Secretary 

Paulson stated that the nine “are healthy institutions, and they have taken this step for the good of 

the U.S. economy. As these healthy institutions increase their capital base, they will be able to 

increase their funding to U.S. consumers and businesses.” A joint statement released by 

Secretary Paulson, Chairman Bernanke and Chairman Bair that same day similarly stated that 

“these healthy institutions are taking these steps to strengthen their own positions and to enhance 

the overall performance of the U.S. economy.” 
17 

Notwithstanding these statements that the nine institutions were healthy, contemporaneous 

reports and officials’ statements to SIGTARP during this audit indicate that there were concerns 

about the health of several of the nine institutions at that time and, as detailed in this report, that 

their overall selection was far more a result of the officials’ belief in their importance to a system 

that was viewed as being vulnerable to collapse than concerns about their individual health and 

viability. Leading up to the October 13, 2008, meeting, for example, Merrill Lynch had suffered 

several consecutive quarters of large losses and had agreed, in September 2008 (over the same 

weekend during which Lehman collapsed), to be acquired by Bank of America. On October 9, 

2008, just three days before the meeting, Moody’s Investors Services put the long term debt of 

both Morgan Stanley and Goldman Sachs on watch for possible downgrade. During the course 

of this audit, Chairman Bernanke told SIGTARP that there were differences in the nine banks in 

terms of strengths and weakness, but that the selection was generalized in order to avoid 

stigmatizing any one bank as being a weak bank and creating a panic. He stated that the 

differences among the firms with regard to their health were less important than the fact that all 

the banks were systemically important and interconnected. He recounted, for example, that a 

few of the banks were under stress, but that they were included because they were key players in 

the financial markets. Indeed, Chairman Bernanke said that the Federal Reserve believed that 

each of the banks in the original nine faced certain risks given the economic environment that 

preceded the announcement of the CPP and was concerned that the failure of a systemically 

significant institution could rapidly cause the failure of others due to the high degree of 

interconnectedness of the systemically significant institutions. For his part, although former 

Secretary Paulson stated that each of the nine financial institutions was viewed as viable and 

healthy, he also acknowledged that he was aware of no independent assessment of the conditions 

of the nine institutions at the time. He further acknowledged that he was concerned during the 

lead up to the CPP announcement that one of the nine institutions (which has since paid back its 

CPP investment) was in danger of failing, and that, in retrospect, it was clear some of the nine 

were healthier than others. Secretary Geithner, who was then President of the FRBNY told 

SIGTARP that, in selecting the first nine institutions, size and importance were the key 

characteristics that guided the process, and that no judgments were made as to their strength or 

weakness. 

Of course, two of the nine institutions—Citigroup and Bank of America—just months later 

needed further support. Citigroup’s fourth quarter 2008 losses totaled $17.26 billion. After 

taking $25 billion in capital injections under the CPP, Citigroup later accepted an additional $20 

billion of government funds under TARP’s Targeted Investment Program (“TIP”). Citigroup also 

required support from the Asset Guarantee Program (“AGP”), in which Treasury, the Federal 

Reserve, and the FDIC agreed to provide guarantees on a pool of $301 billion of troubled assets. 

Large fourth quarter losses at Merrill Lynch ($15.31 billion) would also later necessitate 

additional government assistance to its acquirer, Bank of America, as further discussed later in 

this report. 

Accepting CPP Funds for the “Good of the Country” and Restoring 

Confidence in the Financial System 

After the list of the nine institutions was established, Secretary Paulson made phone calls to the 

bank executives on October 12, 2008, and requested that they come to Washington, D.C., for a 

meeting the next day. At the meeting on October 13, 2008, senior government leaders led by 
18 

Secretary Paulson, Chairman Bernanke, FRBNY President Geithner, FDIC Chairman Sheila 

Bair, and Comptroller of the Currency John Dugan, told them that providing capital to their 

institutions as a group was designed to demonstrate clearly the government’s support for, and to 

rebuild public confidence in, the U.S. financial sector, and that they needed to accept the capital 

injections for the “good of the country.”26 In an analysis prepared by the FRBNY, staffers noted 

that it was crucial to inject large amounts of capital into these nine institutions (and subsequently 

to other participating banks) as quickly and as nearly simultaneously as possible “in order to give 

the maximum amount of certainty to market participants that the banking system can withstand 

any near term credit loss.” 

Officials at Treasury, the Federal Reserve, and other federal regulators felt strongly that the nine 

institutions should not be permitted to reject the government’s capital infusions. Documentation 

obtained from Treasury suggests that if the banks had not accepted, their regulators would have 

required them to accept the funds. For example, a draft “CEO talking points” prepared for 

Secretary Paulson state that “if a capital infusion is not appealing, you should be aware that your 

regulator will require it anyway.” Furthermore, former Secretary Paulson told SIGTARP that if 

necessary, the government would make clear to the nine executives that they had no choice but 

to take the money. Indeed, one bank executive told SIGTARP that the impression he received 

from Secretary Paulson and other regulators was that the executives did not have a choice in the 

matter. However, in describing the meeting, one federal regulator told SIGTARP that, although 

the government strongly encouraged the bank executives to take the funds, it did not “force” 

them to do so. Knowing that the nine executives needed approval from their board of directors 

to participate in the capital injection program, but confident that the agreements would ultimately 

be signed, Treasury staff pre-arranged for nine private offices in the Treasury building to allow 

the executives to call their boards and senior personnel. 

According to the bank executives interviewed by SIGTARP, there was limited debate among the 

participants as to the government’s rationale for adopting the capital injection plan. These 

executives told SIGTARP that all participants understood the severity of the situation, the 

government’s strong belief that things were going to get worse, and that immediate action was 

needed to address the rapidly deteriorating economic conditions. One of the executives 

expressed concern about the amount of capital he was asked to take, but agreed with the 

government’s rationale that swift and decisive actions were required to stem the crisis. This 

executive recalled others in the group remarking that the CPP was a good idea, and that they took 

the government’s funds because of the reasonable terms. Another executive also recalled that 

some executives commented that the government’s funds were “cheap money.” 

These six executives also told SIGTARP that government officials strongly urged them to accept 

the capital injections as a group, irrespective of whether they believed that their institutions 

required such substantial assistance. Federal Reserve officials later explained that acting as a 

group would help avoid any stigma that might have been associated with accepting capital from 

 

26 The nine executives were Vikram Pandit (Citigroup), Jamie Dimon (JPMorgan Chase), Richard Kovacevich 

(Wells Fargo), John Thain (Merrill Lynch), John Mack (Morgan Stanley), Lloyd Blankfein (Goldman Sachs), 

Robert Kelly (Bank of New York Mellon), and Ronald Logue (State Street), and Kenneth Lewis (Bank of America). 

Key Federal officials included Secretary Paulson (Treasury), Chairman Bernanke (Federal Reserve), President 

Geithner (FRBNY), Chairman Bair (FDIC), Comptroller Dugan (Comptroller of the Currency), and other senior 

federal officials. 
19 

the government. If some of the institutions had accepted capital and others had not, the markets 

may have viewed the decision to accept capital as a sign that the institution was experiencing 

financial problems. Such an assessment by investors could have led to a further destabilization 

of financial institutions and markets. By requiring that the institutions accept government capital 

at the same time, the participating institutions would be less likely to suffer adverse market 

consequences. Further, it was argued that those who opted out would be left vulnerable and 

exposed if the economy further deteriorated. 

The meeting began at 3:00 p.m. After remarks by Secretary Paulson, program details were 

provided by FRBNY President Geithner and other federal officials, along with discussion among 

the participants. The nine executives had limited time to discuss the capital injection plan with 

their respective boards of directors before returning with signed agreements. One bank executive 

stated that some executives immediately signed the term sheets placed before them and left 

within an hour after the meeting. Another executive told his board of directors that they could 

take all the time they needed, but it was not going to change the government’s expectation of a 

signed agreement by the end of the day. By 6:25 p.m., all nine executives had signed the 

agreements and agreed to accept the CPP funds. 

Basis for Funding Amounts 

In determining the amount of capital provided to Bank of America and the eight other financial 

institutions, Treasury decided to use $125 billion—half of the $250 billion that was available to 

Treasury at the time under Section 115 of EESA.27 The other half of the available funds were to 

be injected into subsequent banks applying for funds under a formalized CPP approval process. 

More specifically, Treasury determined that institutions receiving CPP funds should receive 

between one percent and three percent of their risk-weighted assets,28 with a maximum of $25 

billion. Based on their risk-weighted assets, six of the nine financial institutions in the initial 

group—JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank of New York 

Mellon Corp, and State Street Corporation—followed roughly the established formula and 

received either close to the three percent or the maximum amount of capital allowed under the 

program (see Table 2). However, the determination of capital injections for three other financial 

institutions—Wells Fargo, Bank of America, and Merrill Lynch—was complicated by merger 

agreements. 

 

27 The $700 billion made available to Treasury came in three authorizations. The first authorization was for $250 

billion; the second was for $100 billion; and the third was for $350 billion. 

28 Risk-weighted assets are the amount of a bank’s total assets after applying an appropriate risk factor to each asset 

and to selected off-balance sheet positions. 
20 

Table 2: Top U.S. Financial Institutions’ Risk-weighted Assets and CPP Funds 

Received (in $ billion) 

Source: Federal Reserve, Securities and Exchange Commission, and Treasury 

Note: aData for Goldman Sachs is from August 29, 2008; data for Morgan Stanley is from August 31, 2008; data for Merrill 

Lynch is from September 26, 2008. 

b

All but Bank of America, Wells Fargo, and Citigroup have paid back their CPP funds, leaving $75 billion of the $125 billion 

outstanding.

Table 2 shows that Wells Fargo was approved for $25 billion even though its risk-weighted 

assets did not qualify it to receive the allowable maximum amount of CPP funds. At that time, 

Wells Fargo was in the process of acquiring Wachovia, which was in danger of default. It had 

received regulatory approval for the acquisition on October 12, 2008, and was cleared for 

immediate consummation (which occurred on December 31, 2008). Thus, Treasury and federal 

regulators viewed Wells Fargo and Wachovia as one entity at the October 13, 2008, meeting. 

When Wachovia’s assets were considered, the combined institution was qualified to receive $25 

billion in CPP funds. With the acquisition of Wachovia, Wells Fargo became the fourth-largest 

bank holding company in the nation, as of March 2009 (see Appendix D). 

Although Wells Fargo and Wachovia were considered one institution, Bank of America and 

Merrill Lynch were not, even though they too were in the process of merging. In contrast to the 

Wells Fargo and Wachovia merger, Bank of America had not received regulatory approval for 

the merger at the time of the October 13, 2008, meeting. Therefore, based on interviews 

SIGTARP held with Mr. Lewis and federal officials, Merrill Lynch was considered an 

independent entity with its own Board of Directors separate from Bank of America. 

Consequently, $10 billion was pledged to Merrill Lynch and $15 billion to Bank of America, 

with the agreement that Bank of America would receive the full amount of both pledges on 

consummation of the merger. However, as Table 2 also shows, the amount of Bank of 

America’s risk-weighted assets would have qualified it to receive $25 billion on its own and 

Financial Institution

Risk-weighted 

Assets as of 

9/30/08

3 percent of

Risk-weighted 

Assets

CPP Funds 

Received 

JPMorgan Chase & Co. $1,377.06 $41.31 $25.00

Citigroup Inc. 1,175.71 35.27 25.00

Bank of America Corporation 1,328.01 39.84 15.00

Wells Fargo & Company 525.69 15.77 25.00

Wachovia Corporation 585.06 17.55 N/A

Goldman Sachsa 379.17 11.38 10.00

Morgan Stanleya 296.59 8.90 10.00

Merrill Lynch & Co., Inc.a 304.02 9.12 10.00

Bank of New York Mellon Corp 125.12 3.75 3.00

State Street Corporation 75.03 2.25 2.00

Total $125.00b 
21 

without consideration for the Merrill Lynch merger.29 According to Federal Reserve officials, 

Bank of America was required to wait until the merger was completed to receive the additional 

funds because the $10 billion was intended for Merrill Lynch—not Bank of America. Once the 

merger was completed, Bank of America’s total amount received under the CPP would equal 

$25 billion, on par with the other large commercial banks. The merger received regulatory 

approval on November 26, 2008, and was completed on January 1, 2009. 

Subsequent CPP Approval Process Was Put in Place for 

Viable Banks To Receive Government Capital 

In contrast to the process for selecting the first nine financial institutions, Treasury required later 

financial institutions to submit an application to be considered for capital investments under the 

CPP. Each application was submitted through the institution’s primary federal regulator and 

then sent through a tiered review and approval process. The primary federal regulator provides 

an initial screening and prepares a case decision memorandum detailing quantitative and 

qualitative aspects of the institution’s viability. It then determines whether to forward the 

application for Treasury’s review based on its initial assessment. Prior to forwarding the 

application to Treasury, however, the regulator may send the application to an interagency CPP 

Council where a representative from each of the four primary federal regulators evaluates the 

merit of the application and decides whether to forward the application to Treasury. At 

Treasury, each application is considered by an Investment Committee comprising of three to five 

senior Treasury officials. A majority of the Investment Committee members must recommend 

approval of the application before the Assistant Secretary for Financial Stability officially 

approves the investment of funds. Eligibility for CPP funds for the institutions that go through 

this process is based on an assessment of the strength and viability of each applicant, as 

measured primarily by examination ratings and performance ratios, without taking into account 

the potential application of TARP funds. Final approval for CPP funding comes from the 

Assistant Secretary for Financial Stability.30

Although the first nine financial institutions did not go through the formal CPP process, Treasury 

officials retroactively applied part of the new CPP procedures to some of these institutions. 

Specifically, primary federal regulators subsequently submitted the case decision memoranda, 

and the Investment Committee ratified the prior approval of funding for JPMorgan Chase, 

Citigroup, Bank of America, Wells Fargo, Morgan Stanley, Goldman Sachs, State Street, and the 

Bank of New York Mellon during its first meeting on October 23, 2008. Also approved for 

funding at the meeting were 24 other banks.31 The next day, the Investment Committee 

 

29 The Bank of America Chief Executive Officer, Kenneth Lewis, speculated to SIGTARP that his institution had 

recently raised $10 billion in capital that could have influenced Treasury’s decision to initially allocate only $15 

billion to Bank of America. 

30 SIGTARP conducted a separate review that examined the external influences on the CPP funding approval 

process. See SIGTARP-09-002, “Opportunities To Strengthen Controls To Avoid Undue External Influence over 

Capital Purchase Program Decision-Making,” August 6, 2009. 31 Other institutions and their subsidiaries included: Wachovia, Valley National Bancorp, Saigon National Bank, the 

PNC Financial Services Group, Inc., Old National Bancorp, KeyCorp, Huntington Bancshares Inc., First Horizon 

National Corporation, First Community Bancshares, Inc., City National Corporation, Centerstate Banks of Florida, 

Inc., Capital One Financial Corporation, Regions Financial Corporation and Regions Bank, HF Financial 

Corporation, Washington Federal Savings & Loan Association, First Niagara Financial Group, Inc, Crossroads 
22 

approved funding for Merrill Lynch and several other institutions. Treasury provided CPP funds 

to all institutions, except for Merrill Lynch, on October 28, 2008. Once the acquisition was 

completed, Bank of America received Merrill Lynch’s CPP investments on January 9, 2009. 

 Bank, SunTrust Banks, Inc. Broadway Federal Bank, Western Illinois Bancshares, Northern Trust Corporation, 

UCBH Holdings, Inc. /United Commercial Bank, Mountain 1st Bank & Trust Company, and Bank of Commerce 

Holdings. 
23 

Officials Believed that Terminating the Merger 

with Merrill Lynch Could Undermine the 

Viability of Bank of America and Destabilize the 

Financial System 

This section addresses the basis for the decision by Treasury and federal regulators to provide 

Bank of America with additional assistance following the acquisition of Merrill Lynch, and 

federal efforts to forestall Bank of America from terminating the planned acquisition. Citing 

substantial and growing losses, the Bank of America Chief Executive Officer informed Treasury 

and Federal Reserve officials that the Bank was considering terminating the planned acquisition 

of Merrill Lynch. Because Treasury and Federal Reserve officials believed that the termination 

of this acquisition could potentially weaken Bank of America and destabilize financial markets, 

they pressured Bank of America to complete the acquisition and provided Bank of America, at 

its request, $20 billion in additional TARP funds and asset guarantees worth up to $118 billion 

against possible future losses. Since it was completed, however, numerous questions have 

emerged about the acquisition and the extent to which government officials pressured Bank of 

America to complete the merger without making public Bank of America and Merrill Lynch’s 

losses. SIGTARP reviewed available documentation and interviewed key principals involved in 

the discussions to address this issue. 

Treasury and the Federal Reserve React Strongly to the 

Possibility of a Failed Merger 

On December 17, 2008, Bank of America’s Chief Executive Officer, Kenneth Lewis, called 

Secretary Paulson and Chairman Bernanke and informed them that substantial losses at Merrill 

Lynch could justify Bank of America’s invoking the merger agreement’s material adverse 

change (or MAC) clause,32 which would allow the bank to either renegotiate with Merrill Lynch 

on more favorable terms or completely back out of the acquisition agreement. During a meeting 

held later that evening, Secretary Paulson, Chairman Bernanke, and other Treasury and Federal 

Reserve officials discussed a number of issues with Mr. Lewis and two other Bank of America 

senior executives, including: 

• the nature of Merrill Lynch’s losses 

• the risks of invoking the MAC to the financial system, Bank of America, and Merrill 

Lynch 

• the availability of TARP funds 

 

32 The MAC clause (also sometimes referred to as the material adverse event clause) is a legal provision often found 

in mergers and acquisition contracts. MAC clauses typically allow the buyer to get out of an agreement if certain 

conditions, such as the seller’s financial condition, have materially changed. 
24 

The meeting concluded with Secretary Paulson’s request that Bank of America executives take 

no action relative to the MAC and give the government time to consider its options. A few days 

later, on December 21, 2008, Mr. Lewis again contacted the Secretary of the Treasury, stating 

that he still intended to invoke the MAC clause because of increasing losses at Merrill Lynch. 

According to Chairman Bernanke and former Secretary Paulson, the view of Federal Reserve 

lawyers was that it was highly unlikely that Bank of America would be successful in terminating 

the contract by invoking the MAC clause. Furthermore, an attempt to invoke the MAC clause 

would likely involve extended and costly litigation with Merrill Lynch that, with significant 

probability, would result in Bank of America being required to pay substantial damages. The 

merger agreement between Bank of America and Merrill Lynch states that when determining 

whether a material adverse effect [MAC] has occurred, both parties will disregard the effects 

resulting from, among other things, “changes in global, national or regional political conditions 

including changes generally in prevailing interest rates, currency exchange rates, credit markets 

and price levels or trading volumes in the United States [...]generally affecting the industries in 

which the relevant party or its subsidiaries operate and including changes to any previously 

correctly applied asset marks resulting therefrom.” As such, Federal Reserve lawyers concluded 

that exercising the MAC clause was not a legally reasonable option. Mr. Lewis also told 

SIGTARP that it was unclear whether Bank of America could win a MAC clause case and that if 

invoked, there would be hefty lawsuits against the company. 

Federal Reserve and Treasury officials also feared that Bank of America’s invocation of the 

MAC clause could lead to a destabilization of Bank of America, Merrill Lynch, and the broader 

financial system. A failed acquisition could lead investors to speculate that Bank of America 

was not strong enough to acquire Merrill Lynch. This could result in a loss of confidence in the 

judgment of the bank’s management and additional downgrades by the credit-rating agencies, 

which could make it more difficult to obtain funding. Both former Secretary Paulson and 

Chairman Bernanke told SIGTARP that invoking the MAC would show poor judgment on the 

part of Bank of America’s management and that the decision was ‘ill-advised.” For Merrill 

Lynch, federal officials and industry executives believed that the institution would likely not 

survive if the merger failed. According to Federal Reserve officials, a failed merger would: 

• limit Merrill Lynch’s ability to access the interbank funding markets as investors 

perceived the firm being at risk 

• severely limit its ability to fund and transact with counterparties as other institutions lost 

confidence in the firm 

• cause it to have difficulty in raising new capital and/or receive government support 

because of the uncertainty about its prospects and possible future losses 

For the broader financial system, federal officials believed that the spillover effects of a failed 

merger would threaten the viability of otherwise financially sound institutions and cause 

collateral damage to the economy because Bank of America and Merrill Lynch participate in 

several critical financial markets and are interconnected with and exposed to other systemically 

important financial institutions. 
25 

There has been much public discussion regarding how strongly the Federal Reserve and Treasury 

officials pressured Bank of America executives to go forward with the acquisition of Merrill 

Lynch. Email communications show that the issue of removing Bank of America’s management 

and Board of Directors was discussed among some Federal Reserve officials. For example, in an 

email written on December 20, 2008, a Federal Reserve Bank Richmond official summarized a 

conversation he had with Chairman Bernanke, stating, “just had a long talk with [Chairman 

Bernanke]. Says they think the MAC threat is irrelevant because it’s not credible. Also intends 

to make it even more clear that if they play that card and then need assistance, management is 

gone.” However, the email communications obtained by SIGTARP does not provide indication 

that such views were voiced by Chairman Bernanke to Mr. Lewis. In fact, Chairman Bernanke 

testified to the House Committee on Oversight and Government Reform on June 25, 2009, that 

he did not make such threats to Mr. Lewis. 

On the other hand, former Secretary Paulson testified to the same committee that he told Mr. 

Lewis that the Federal Reserve could remove Bank of America’s management and the Board of 

Directors if the MAC clause was invoked and the merger agreement was abandoned. He 

explained to SIGTARP that such a position was justified because of the risk to the financial 

system and that investors would perceive invoking the MAC as poor judgment. Mr. Lewis also 

stated in his deposition taken at the New York Office of the Attorney General on February 26, 

2009, that Secretary Paulson made statements about removing Bank of America’s Board and 

management. He subsequently relayed Secretary Paulson’s statements to his Board of Directors 

in a special meeting held on December 22, 2008. Although confirming the threat of possible 

removal, Mr. Lewis told SIGTARP that he also independently came to the same conclusion that 

the potential failure of the merger would be harmful to his bank. Consequently, he concluded 

that it was in the best long-term interest of the shareholders to go forward and complete the 

merger. 

No Indication of Federal Direction to Bank of America Regarding 

the Disclosure of Fourth Quarter Losses 

Since the acquisition of Merrill Lynch was completed in January 2009, numerous questions have 

emerged about the acquisition and the extent to which federal officials put pressure on Bank of 

America to complete the merger without making public Merrill Lynch’s losses. Specifically, 

questions have arisen over whether the federal government directed Mr. Lewis not to disclose 

Merrill Lynch’s losses to Bank of America’s shareholders. Although it was the government’s 

intention to ensure that the acquisition was “kept on track,” both Chairman Bernanke and former 

Secretary Paulson stated that they did not advise Mr. Lewis to withhold Merrill Lynch’s losses 

from Bank of America’s shareholders. In an interview with SIGTARP, Mr. Lewis confirmed no 

such instruction was given to him by Secretary Paulson or Chairman Bernanke. Chairman 

Bernanke told SIGTARP that if Mr. Lewis “wanted to inform his shareholders of Merrill 

Lynch’s losses, we [the Federal Reserve] would have worked” with him to develop a 

government support plan. Chairman Bernanke also reiterated that the announcement of losses 

has been, and will always be, the responsibility of the institution. In addition, Bank of America’s 

legal counsel informed SIGTARP that he believed that the bank was under a legal obligation to 

announce those losses at the end of each quarter, not mid-stream. Based on the information it 

received and discussions with key principals, SIGTARP found nothing to indicate Treasury and 

Federal Reserve officials instructed Bank of America executives to withhold the public 
26 

disclosure of losses, but that they agreed to provide financial assistance to ensure that Bank of 

America remained a viable financial institution after the acquisition out of concern for the 

financial markets as a whole. 

Former Secretary Paulson and Mr. Lewis told SIGTARP that, after agreeing to go forward with 

the merger on December 21, 2008, Bank of America executives asked for a letter committing the 

government to future financial support. According to Mr. Lewis, he wanted a formal 

commitment from the government to assure his Board of Directors that future financial support 

was forthcoming. However, Secretary Paulson refused to provide bank executives with written 

assurance of the government’s additional assistance, stating that the decision-making process for 

additional support had not yet occurred. Moreover, once any written assurance was provided, it 

would become a “disclosable event.” Secretary Paulson told SIGTARP that he and Chairman 

Bernanke assured Mr. Lewis that the government would provide assistance to his bank and that 

they were not going to let a systemically significant institution fail. However, they could not 

issue a statement of such support until their staff had the opportunity to review the type of 

assistance required and the assets that might be included in the support package. As a result, an 

announcement of additional government support could not be made until an agreement was 

reached. 

Losses that Could Destabilize Bank of America and the 

Broader Financial System Resulted in Additional Support 

While Federal Reserve officials believed that a failure of Bank of America to complete the 

merger agreement with Merrill Lynch could prove destabilizing to the financial markets, they 

also believed that losses at both companies, but particularly at Merrill Lynch, were likely to have 

an adverse effect on Bank of America. During the meeting with former Secretary Paulson and 

Chairman Bernanke on December 17, 2008, Mr. Lewis and other Bank of America senior 

executives stated that Merrill Lynch’s losses had been projected to be flat for the fourth quarter 

when the merger plan was initially agreed upon in September 2008. However, Mr. Lewis stated 

that estimated losses for the fourth quarter had accelerated by mid-December. In the fourth 

quarter of 2008, Merrill Lynch eventually lost $15.31 billion after tax (approximately $21.53 

billion pretax). This was almost three times worse than its performance in the third quarter when 

it posted losses of more than $5.15 billion. Largely reflecting a significant decline in revenues, 

Merrill Lynch posted losses of more than $27 billion for the year (see Figure 4). 
27 

Figure 4: Merrill Lynch After-Tax (Net) Losses from End of 2007 through 2008 

($ in billions) 

Source: Merrill Lynch and the SEC 

In addition to Merrill Lynch’s losses, Mr. Lewis told SIGTARP that the unexpected and sharp 

market deterioration in the fourth quarter of 2008 resulted in losses for Bank of America and 

several other major financial institutions. Figure 5 shows that Bank of America lost $1.79 billion 

in the fourth quarter, the first time it had posted a quarterly loss in more than 17 years. Its yearend financial data shows that the losses were due, in part, to escalating credit costs linked to the 

economic downturn and continued capital markets disruptions. It reported write-downs in its 

capital markets business, including losses on collateralized debt obligations33 of $1.7 billion and 

write-downs on commercial mortgage-backed securities of $853 million. Bank of America was 

considered a well-capitalized company, but documentation obtained from the Federal Reserve 

shows that federal regulators were concerned that, once Bank of America merged with Merrill 

Lynch, the amount of tangible common equity at the combined entity would be among the lowest 

of the large bank holding companies. This would make Bank of America vulnerable if the 

financial system experienced further deterioration. 

 

33 A collateralized debt obligation is a financial instrument that entitles the purchaser to some portion of the cash 

flows from a portfolio of assets, which may include bonds, loans, or mortgage-backed securities. 

‐1.96

‐4.65 ‐5.15

‐$16.0 ‐15.31

‐$14.0

‐$12.0

‐$10.0

‐$8.0

‐$6.0

‐$4.0

‐$2.0

$0.0

$2.0

$4.0

4Q07 1Q08 2Q08 3Q08 4Q08

Billion

-$27.08
28 

Figure 5: Bank of America Net Income Gain/Loss from 2007-2009 ($ in billions) 

Source: Bank of America 

In response to Mr. Lewis’ request for additional government assistance, Treasury, the Federal 

Reserve, and FDIC subsequently agreed to provide additional assistance to shore up the 

combined company’s financial position and reduce the risk of market disruption once the merger 

was complete. 

$20 Billion in Additional Capital under the Targeted Investment 

Program 

On January 16, 2009, Treasury made an additional investment in Bank of America by acquiring 

$20 billion in newly issued senior preferred stock under the TIP. Combined with the $25 billion 

received under the CPP, Treasury’s total capital injection into Bank of America now totals $45 

billion. Because the ceiling on the amount of capital that Treasury could provide under the CPP 

was capped at $25 billion, the TIP was used as a vehicle to infuse additional assistance to Bank 

of America. The preferred stock acquired under the TIP carries an 8 percent dividend payable to 

Treasury. As required by EESA, Treasury also received warrants to purchase common stock of 

Bank of America at a strike price34 of $13.30 per share and with an aggregate value of $2 billion. 

Bank of America will be prohibited from paying dividends on common stock in excess of $.01 

per share per quarter for three years without the consent of Treasury. 

$118 Billion in Loss-sharing Agreement under the Asset Guarantee 

Program 

To further help restore confidence in Bank of America, Treasury, FDIC, and the Federal Reserve 

also agreed to share losses with the bank on a designated pool of up to $118 billion of loans, 

securities backed by residential and commercial real estate loans and corporate debt, derivative 

 

34 A strike price is the stated price per share for which underlying stock may be purchased by the option holder upon 

exercise of the option contract. 

‐$3.0

‐$2.0

‐$1.0

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Billion
29 

transactions that reference such securities, and other financial assets. The pool would contain 

both Merrill Lynch (about 75 percent) and Bank of America (about 25 percent) assets. Based on 

the preliminary terms of the arrangement, Bank of America would absorb the first $10 billion of 

losses in the asset pool. If the losses on these assets exceeded this amount, then Bank of 

America would absorb 10 percent of the additional losses of the pool of assets, and Treasury and 

FDIC would absorb 90 percent of the losses, up to $10 billion. The terms would be in effect for 

ten years for residential mortgage-related assets and five years for other assets. As compensation 

for these guarantees, Treasury would receive $3 billion, and FDIC would receive $1 billion in 

preferred stock with an 8 percent annual dividend rate, and accompanying warrants. The Federal 

Reserve would provide Bank of America non-recourse loans backed by these assets with the 

same 90 percent and 10 percent loss-sharing provision if the coverage from Treasury and FDIC 

were to be exhausted. 

Although the AGP term sheet was negotiated in January 2009, the final agreement was not 

completed. On May 6, 2009, Bank of America requested termination of its participation in the 

program because executives believed that the cost of the guarantees outweighed the potential 

benefits. Mr. Lewis and other senior executives told SIGTARP that future losses would not 

exceed the initial $10 billion that the bank would need to cover under the terms of the AGP. The 

Federal Reserve, Treasury, and FDIC reviewed the effects of Bank of America’s withdrawal 

from the program and negotiated with Bank of America regarding a fee to be paid that 

recognized both the costs incurred by the government and the benefits received by Bank of 

America once its participation in the AGP was announced. The termination agreement was 

reached on September 21, 2009 and Bank of America agreed to pay $276 million to Treasury, $57 

million to the Federal Reserve, and $92 million to the FDIC.
30 

Conclusions and Lesson Learned 

Faced with the threat of an unparalleled economic crisis, Treasury, the Federal Reserve and 

FDIC implemented programs designed to help prevent a further deterioration of the economy 

and a significant risk of financial market collapse. It may be difficult in the near term to assess 

fully the impact of Treasury’s initial injections of capital to the first nine institutions on 

preventing an economic collapse. What is clear, however, is that key federal officials and senior 

industry leaders believed that the risks to the financial stability and economic growth of the 

United States and the rest of the world were too great for inaction. 

In addition, former Secretary Paulson and Chairman Bernanke believed that the already fragile 

financial system could further destabilize if the acquisition of Merrill Lynch failed. This 

contributed to their decision to press Bank of America to consummate the transaction and then to 

provide it with additional financial support to help ensure that the bank remained a viable 

financial institution after the merger and to avert what they thought could be another marketdestabilizing event. 

At the same time, Treasury’s description of how the investments in the first nine institutions 

were made in October 2008 highlights what should be an important lesson for how Treasury 

should describe its actions and rationales in future programs. In an October 14, 2008, statement 

announcing the investment in the original nine institutions, Secretary Paulson stated: “These are 

healthy institutions, and they have taken this step for the good of the U.S. economy. As these 

healthy institutions increase their capital base, they will be able to increase their funding to U.S. 

consumers and businesses.” The nine institutions were similarly described as healthy in a joint 

statement released that same day by Treasury, the Federal Reserve and FDIC, and in a separate 

statement released by Treasury. 

It is apparent, however, that senior Government officials had affirmative concerns, at the time 

the nine institutions were selected, about the health of at least some of those institutions: the 

Federal Reserve had concerns over the financial condition of several of these institutions 

individually and for all of them collectively absent some governmental action; and former 

Secretary Paulson noted concerns about the potential of an outright failure of one of the 

institutions. In addition to the basic transparency concern that this inconsistency raises, by 

stating expressly that the “healthy” institutions would be able to increase overall lending, 

Treasury may have created unrealistic expectations about the institutions’ condition and their 

ability to increase lending. Treasury and the TARP program lost credibility when lending at 

those institutions did not in fact increase and when subsequent events — the further assistance 

needed by Citigroup and Bank of America being the most significant examples — demonstrated 

that at least some of those institutions were not in fact healthy. 

It is not our intent to suggest that Government officials should make public their concerns over 

the financial health of individual institutions, but rather that government officials should be 

particularly careful, even in a time of crisis, of describing their actions (and the rationales for 

such actions) in an accurate manner. Ultimately, the lesson is straightforward: accuracy and 

transparency will enhance the credibility of Government programs like TARP and restore 
31 

taxpayer confidence in the policy makers who manage them; inaccurate statements, on the other 

hand, could have unintended long-term consequences that could damage the trust that the 

American people have in their Government. 
32 

Management Comments and Audit Response 

SIGTARP received official written responses to this report from both Treasury’s Office of 

Financial Stability and the Board of Governors of the Federal Reserve Board (the “Federal 

Reserve”). 

In a letter from its General Counsel, the Federal Reserve concurred with the report’s findings and 

expressly agreed “that an important lesson illustrated by the events that shocked the financial 

systems over the past two years is that transparency and effective communication are important 

to restoring and maintaining public confidence, especially during a financial crisis.” (Emphasis 

added.) For the Federal Reserve’s full response see Appendix H. 

Treasury, in contrast, did not express as positive a position on SIGTARP’s findings. Although 

Treasury characterized the report as “a useful contribution,” it did not expressly state whether it 

concurred with the lesson learned that SIGTARP identified in the report. Indeed, Treasury’s 

response appears to take issue with SIGTARP’s call for the need for careful consideration of 

public statements in a time of crisis, stating that “[w]hile people may differ today on how the 

contemporaneous announcements about the reasons for selecting the initial nine recipients 

should have been phrased, any review of such announcement must be considered in light of the 

unprecedented circumstances in which they were made.” 

Although SIGTARP certainly acknowledges the unprecedented circumstances that Treasury was 

operating under last fall, we believe that the lesson to be learned here is that it is precisely during 

such extraordinary times, as the Federal Reserve correctly noted, that the Government must 

exercise increased vigilance about accuracy and transparency in its statements to the public. It is 

axiomatic that the Government’s capacity to address financial crises depends in no small 

measure on its credibility, both with market participants whose confidence is essential to 

stabilize the financial system and with the American public whose confidence is essential to 

underpin the political support necessary to take the difficult (and often expensive) steps that are 

needed. Accuracy and transparency can enhance the public’s understanding of and support for 

government programs, whereas statements that are less than careful or forthright—like those 

made in this case—may ultimately undermine the public’s understanding and support for these 

same programs. This loss of public support could damage the government’s credibility and have 

long-term unintended consequences that actually hamper the Government’s ability to respond to 

crises. For Treasury’s full response, see Appendix I. 

SIGTARP also received informal and technical comments from the Federal Reserve, Treasury, 

FDIC, and the Office of the Comptroller of the Currency. These were incorporated into the draft 

where appropriate. 
33 

Appendix A—Scope and Methodology 

We performed the audit under authority of Public Law 110-343, as amended, which also 

incorporates the duties and responsibilities of inspectors general under the Inspector General Act 

of 1978, as amended. Work was completed from February to September 2009 as Project 

Number 003. 

To determine the events that influenced the decision of Treasury officials and primary federal 

regulators to select the first nine institutions—including Bank of America—to receive CPP 

funds, SIGTARP’s Audit Division performed general research using academic studies, business 

and economic periodicals, and other available publications. We corroborated the importance of 

these events and their effect on the government’s decision-making process by interviewing key 

principals and policy-makers, including former and current Secretaries of the Treasury, the 

Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal 

Deposit Insurance Corporation, the Comptroller of the Currency, as well as other senior officials 

and staff members from Treasury, the Federal Reserve Board, the Office of the Comptroller of 

the Currency, and the Office of Thrift Supervision. 

To determine the rationale and criteria for selecting the first nine financial institutions to receive 

CPP funds, we interviewed the above key principals and further supported their testimonials with 

data obtained from their offices, including email communications, internal legal opinions, and 

financial analysis. We also spoke with the chief executives of Bank of America, Merrill Lynch, 

Wells Fargo, Goldman Sachs, State Street, and Bank of New York Mellon to obtain their views 

on the selection process, their understanding of the government’s rationale, and their reasons for 

accepting the funds. We also reviewed these institutions’ financial regulatory filings and 

obtained data on total asset values, risk-weighted assets, and gains and losses for the last several 

reporting quarters. 

To determine the basis for the decision of Treasury and federal regulators to provide Bank of 

America with additional government assistance, we focused on statements provided by officials 

at the Federal Reserve Board, Treasury, and other primary federal regulators. We reviewed 

written and oral testimonies made by former Secretary Paulson, Chairman Bernanke, and Mr. 

Lewis to the House Committee on Government Oversight and Reform. We also obtained 

analyses from the Federal Reserve Board, some of which originated from the Federal Reserve 

Banks of Richmond and New York. Officials from the Office of Financial Stability also 

provided additional information. 

Numerous issues have arisen in the aftermath of the Bank of America and Merrill Lynch merger. 

Some of these issues are the focus of ongoing investigations, including by SIGTARP’s 

Investigations Division, and are, therefore, not discussed in this report. 

This performance audit was performed in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe that the evidence obtained provides a reasonable basis 

for our findings and conclusions based on our audit objectives. 
34 

Limitations on Data 

Federal Reserve Board officials provided institution-specific data and an analysis of the state of 

the U.S. economy that was deemed sensitive, confidential, and, restricted. As a result, we could 

only generalize from the data obtained. In addition, we relied on the judgment of the staff from 

these offices to provide us with complete information for us to perform our review. Other data 

may exist that we did not have the opportunity to review. 

Use of Computer-processed Data 

We relied on the financial institutions’ quarterly and annual filings with the SEC. Because 

financial institutions are required by law to submit these financial statements, we view the 

information contained in them as the best representation of the institutions’ financial standings. 

Internal Controls 

As part of our review of the selection of the initial nine institutions to receive CPP funds and the 

decision to provide Bank of America with additional government support, we examined the 

government’s criteria and rationale behind these one-time decisions. In this regard, we evaluated 

the internal controls over the decisions of Treasury and the Federal Reserve to validate the 

magnitude of the losses of Merrill Lynch and Bank of America. 
35 

Appendix B—Measures To Stabilize Financial 

Markets before EESA Passage 

Initiatives Date Agency Description 

Reduce Primary Credit 

Rate 

Reduce Federal Funds 

Rate 

August 2007 

to April 2008 

Federal Reserve Primary Credit Rate reduced from 5.75 

percent to 2.25 percent. Maximum 

Primary Credit Borrowing Term increased 

to 30 days. The maximum term later 

increased to 90 days. 

Federal Funds Rate reduced from 5.25 

percent to 2 percent. 

HOPE NOW October 

2007 

Treasury An alliance of investors, servicers, 

mortgage market participants, and credit 

and homeowners’ counselors that works 

with at-risk homeowners to help prevent 

foreclosures. 

Term Auction Facility December 

2007 

Federal Reserve Fixed amounts of term funds will be 

auctioned on a regular basis to depository 

institutions against a wide variety of 

collateral for terms of 28 days. Terms 

later extended up to 84 days. 

Economic Stimulus Act 

of 2008 

February 

2008 

President of the 

United States 

Recovery Rebates, up to $600, and 

Incentives for Business Investment 

Term Securities Lending 

Facility 

March 2008 Federal Reserve Lending of Treasury securities for 28-day 

terms against a range of collateral. Terms 

later extended to up to 84 days. 

Primary Dealer Credit 

Facility 

March 2008 Federal Reserve Extending credit to primary dealers at the 

primary credit rate against a broad range 

of investment-grade securities. 

Limited liability company 

formed (Maiden Lane) to 

facilitate acquisition of 

Bear Stearns by 

JPMorgan Chase 

March 2008 Federal Reserve The FRBNY forms Maiden Lane to control 

$30 billion of Bear Stearns assets that are 

pledged as security for $29 billion in term 

financing at primary credit rate. 

JPMorgan Chase assumes first $1 billion 

of any losses. 

Increase of credit lines 

to Fannie Mae and 

Freddie Mac 

July 2008 Treasury A temporary increase in the credit lines to 

Fannie Mae and Freddie Mac, and a 

temporary authorization for Treasury to 

purchase equity in either enterprise if 

needed. 

Temporary prohibition of 

short sales 

July 2008 Securities and 

Exchange 

Commission 

The Securities and Exchange 

Commission issues emergency order to 

limit short selling in the securities of 

Fannie Mae, Freddie Mac, and primary 

dealers at commercial and investment 

banks. 

Housing and Economic July 2008 President of the Among other provisions, authorizes the 
36 

Recovery Act of 2008 United States Treasury to purchase Fannie Mae’s and 

Freddie Mac’s obligations and reforms the 

regulatory supervision of these entities 

under a new Federal Housing Finance 

Agency. 

Government 

conservatorship of 

Fannie Mae and Freddie 

Mac 

September 

2008 

Federal Housing 

Finance Agency 

and Treasury

The Federal Housing Finance Agency 

places Fannie Mae and Freddie Mac in 

conservatorship. Treasury announces 

three additional measures to complement 

the decision: 

1) preferred stock purchase agreements 

between Treasury/Federal Housing 

Finance Agency and Fannie Mae and 

Freddie Mac to ensure these entities 

positive net worth 

2) a new secured lending facility that will 

be available to Fannie Mae, Freddie 

Mac, and the Federal Home Loan Bank 

3) a temporary program to purchase 

Fannie Mae’s and Freddie Mac’s 

mortgage-backed securities 

Lending Facility for AIG September 

2008 

Federal Reserve The Federal Reserve Board authorizes 

the FRBNY to lend up to $85 billion to AIG 

under Section 13(3) of the Federal 

Reserve Act. Terms of Federal Reserve 

lending later amended in coordination with 

Treasury. 

Temporary ban on short 

sales 

September 

2008 

Securities and 

Exchange 

Commission 

The Securities and Exchange 

Commission announces a temporary 

emergency ban on short selling in the 

stocks of all companies in the financial 

sector. 

Creation of the AssetBacked Commercial 

Paper Money Market 

Mutual Fund Liquidity 

Facility 

September 

2008 

Federal Reserve Created to extend non-recourse loans at 

the primary credit rate to U.S. depository 

institutions and bank holding companies 

to finance their purchase of high-quality 

asset-backed commercial paper from 

money market mutual funds. 

Temporary Guaranty 

Program for Money 

Market Mutual Funds 

September 

2008 

Treasury Treasury will insure the holdings of any 

publicly offered eligible money market 

mutual fund that pays a fee to participate 

in the program. The program will make 

$50 billion available from the Exchange 

Stabilization Fund to guarantee 

investments in participating money market 

mutual funds. 

Source: The Federal Reserve Bank of St. Louis, Treasury, and Public Law 110-185 

 
37 

Appendix C—Net Income Gains and Losses from 

2007 to 2009 of Seven U.S. Financial Institutions 

Receiving CPP Funds 

 ‐$3.0

‐$2.0

‐$1.0

$0.0

$1.0

$2.0

$3.0

$4.0

4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Billions

Goldman Sachs

‐$3.0

‐$2.0

‐$1.0

$0.0

$1.0

$2.0

$3.0

$4.0

4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Billions

Wells Fargo

‐$3.0

‐$2.0

‐$1.0

$0.0

$1.0

$2.0

$3.0

$4.0

4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Billions

JPMorgan Chase

‐$4.0

‐$3.0

‐$2.0

‐$1.0

$0.0

$1.0

$2.0

$3.0

$4.0

Billions

4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Morgan Stanley

‐$20.0

‐$15.0

‐$10.0

‐$5.0

$0.0

$5.0

4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Billions

Citigroup Inc.
38 

 

Source: Morgan Stanley, Citigroup, State Street, and the SEC

$0.0

$0.5

$1.0

$1.5

$2.0

4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Billions

State Street Corporation

$0.0

$0.5

$1.0

$1.5

$2.0

4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Billions

Bank of New York Mellon
39 

Appendix D—Selected U.S. Incorporated Bank 

Holding Companies by Total Assets (in $ billions) 

Name 

Asset Value as 

of 6/30/08

Asset Value 

as of 9/30/08

Asset Value 

as of 12/31/08 

Asset Value 

 as of 3/31/09

Bank of America Corp 1,723.27 1,836.45 1,822.07 2,323.42

JPMorgan Chase & Co 1,775.67 2,251.47 2,175.05 2,079.19

Citigroup Inc. 2,100.39 2,050.13 1,938.47 1,822.58

Wells Fargo & Company 609.074 622.36 1,309.64 1,285.89

Goldman Sachs N/Aa N/Aa 1,125.23 925.29

Morgan Stanley N/Aa N/Aa 658.81b 626.02

Wachovia Corporation 812.43 760.56 N/A N/A

PNC Financial Service Group 142.79 145.64 291.09 286.47

U.S. Bancorp 246.54 247.06 267.03 263.62

Bank of New York Mellon Corp 201.34 267.64 237.65 203.88

SunTrust Banks 177.23 174.78 189.14 179.22

State Street Corp 146.52 286.71 176.63 144.86

Citizens Financial Group, Inc. 161.97 163.77 160.44 167.54

Capital One Financial Corp 151.11 154.80 165.91 177.39

Regions Financial Corp 144.44 144.29 146.25 141.95

BB&T Corporation 136.47 137.04 152.02 143.42

Fifth Third Bancorp 114.97 116.29 119.76 119.31

Key Corp 101.96 101.49 105.23 98.37

Source: Federal Reserve and the SEC 

Notes: a Goldman Sachs and Morgan Stanley became bank holding companies in September 2008. b

 As of November 30, 2008 
40 

Appendix E—Key Events in the Bank of America 

and Merrill Lynch Merger 

When Merrill Lynch Chief Executive Officer concluded that Treasury and Federal Reserve 

officials were unlikely to provide assistance to Lehman Brothers, he realized that his institution 

could be next to fail and initiated plans for a merger. He reached out to Bank of America 

executives on September 13, 2008, seeking a deal in which Bank of America would acquire part 

of the firm. Uninterested in a partial investment, however, Bank of America pushed for a 

complete acquisition. Both institutions worked through that weekend and announced plans for 

the merger on Monday, September 15, 2008. After the merger announcement, both institutions 

began developing plans for integration. Shareholders of both institutions ratified the merger 

agreement on December 5, 2008, and the merger was completed on January 1, 2009. 

Date Events 

13 September Merrill Lynch contacts Bank of America to discuss a possible merger. 

14 September Bank of America and Merrill Lynch agree to merge. 

15 September Bank of America publicly announces plans to merge Merrill Lynch; at that time, Merrill Lynch’s 

gains/losses estimated to be even for the fourth quarter of 2008. 

26 November Federal Reserve approves Bank of America’s acquisition of Merrill Lynch. 

5 December Bank of America shareholders approve the acquisition of Merrill Lynch; Merrill Lynch’s fourth 

quarter loss estimated to be about $9 billion, after tax. 

14 December Bank of America updates Merrill Lynch’s estimated fourth quarter losses to be about $12.5 

billion after tax (about $18 billion pre-tax). 

17 December Bank of America informs Treasury and the Federal Reserve of its concerns over Merrill Lynch’s 

fourth quarter losses and its possible withdrawal from merger, citing a MAC clause; Treasury 

requests a meeting with bank executives for that evening; Treasury request Bank of America 

not act while they consider the implications to the financial system of invoking the MAC. 

19 December Bank of America informs the Federal Reserve of additional losses discovered at Merrill Lynch. 

Losses at Merrill Lynch for the fourth quarter of 2008 eventually total $15.31 billion (after tax). 

21 December Bank of America informs Treasury that it is still considering invoking the MAC clause; Treasury 

stated that management and Board of Directors could be removed if Bank of America invoked 

the MAC clause; Bank of America requested a de-escalation on the issue; Bank of America 

calls its Board to discuss Treasury’s position; Treasury assures Bank of America that the 

government will stand behind the company. 

22 December Bank America informs its Board of conversations with Treasury and the Federal Reserve. The 

Board is also informed that Bank of America will not invoke the MAC clause and that Treasury 

and the Federal Reserve agreed to provide additional assistance. At that time, Treasury and 

the Federal Reserve had not provided written assurance of such assistance. 

30 December Bank of America executive convenes a special meeting with the Board of Directors to update 

members on the progress he is making with Treasury and the Federal Reserve regarding 

additional government assistance. 

1 January 2009 Bank of America and Merrill Lynch merger closes. 

16 January 2009 Bank of America announces additional TARP assistance through the TIP and AGP and fourth 

quarter 2008 and end-of-year earnings. 

Source: The State of New York Office of the Attorney General and SIGTARP’s analysis of statements from Mr. Lewis, 

Chairman Bernanke, former Secretary Paulson 
41 

Appendix F—Definitions of Acronyms 

Acronym Definition 

AGP Asset Guarantee Program 

AIG American International Group 

Bank of America Bank of America Corporation 

Bear Stearns Bear Stearns Companies 

Citigroup Citigroup Inc. 

CPP Capital Purchase Program 

EESA Emergency Economic Stabilization Act 

Fannie Mae Federal National Mortgage Association 

FDIC Federal Deposit Insurance Corporation 

FRBNY Federal Reserve Bank of New York 

Freddie Mac Federal Home Loan Mortgage Corporation 

Goldman Sachs Goldman Sachs Group, Inc. 

JPMorgan Chase JPMorgan Chase & Co. 

LIBOR London Interbank Offered Rate 

MAC clause Material Adverse Change clause 

Merrill Lynch Merrill Lynch & Co., Inc. 

OCC Office of the Comptroller of the Currency 

OIS Overnight Indexed Swap 

SEC Securities and Exchange Commission 

SIGTARP Special Inspector General for the Troubled Asset Relief Program 

State Street State Street Corporation 

TARP Troubled Asset Relief Program 

TIP Targeted Investment Program 

Wachovia Wachovia Corporation 

WaMu Washington Mutual Inc. 

Wells Fargo Wells Fargo & Company 

 
42 

Appendix G—Audit Team Members 

This report was prepared and the review was conducted under the direction of Barry W. Holman, 

Director of Audits, Office of the Special Inspector General for the Troubled Asset Relief 

Program. 

The staff members who conducted the audit and contributed to the report include: 

Scott Harmon 

Tinh T. Nguyen 

James Shafer 
43 

Appendix H—Management Comments from the 

Federal Reserve Board
44 
45 

Appendix I—Management Comments from 

Treasury 
46 

SIGTARP Hotline 

If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the 

Troubled Asset Relief Program, please contact the SIGTARP Hotline. 

By Online Form: www.SIGTARP.gov By Phone: Call toll free: (877) SIG-2009 

By Fax: (202) 622-4559 

By Mail: Hotline: Office of the Special Inspector General

for the Troubled Asset Relief Program

1801 L Street, NW, 4th Floor 

Washington, D.C. 20220

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If you have any inquiries, please contact our Press Office: Kristine Belisle, 

Director of Communications 

Kris.Belisle@do.treas.gov

202-927-8940 

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For Hill inquiries, please contact our Legislative Affairs Office: Lori Hayman 

 Legislative Affairs 

 Lori.Hayman@do.treas.gov

 202-927-8941 

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