Bank of America in talks for more bailout funds

By Kevin Drawbaugh and Dan Wilchins

WASHINGTON/NEW YORK (Reuters) - Bank of America, the largest U.S. bank, is close to getting billions of dollars more in federal support from taxpayers, a person familiar with the matter said on Wednesday.

As Congress debated the future of the government's $700-billion financial markets rescue program, the source said that Bank of America has struggled to digest its January 1 buyout of former Wall Street brokerage giant Merrill Lynch & Co.

Merrill's fourth quarter losses exceeded expectations and spurred Bank of America in mid-December to start talking to the U.S. Treasury Department, which is managing the bailout.

U.S. Treasury Secretary Henry Paulson was driving the talks out of concern that Bank of America might be unable to complete the buyout, cutting Merrill adrift, the Wall Street Journal reported earlier on Wednesday.

The size and terms of any aid that could result are still being finalized, with details expected to be announced with Bank of America's fourth-quarter earnings, due out January 20.

In after-hours trading, Bank of America's shares dropped more than 5 percent to the lowest level since 1991. During Wednesday's trading session, Bank of America's shares dropped 4.2 percent to $10.20, down 28 percent so far this year.

Bank of America declined to comment. The White House declined to comment on the original report in the Wall Street Journal, as did a U.S. Treasury spokeswoman.

NEW URGENCY FOR TARP

The news came as President-elect Barack Obama pressured Congress to release a second installment of $350 billion for the bailout program known as the Troubled Asset Relief Program, or TARP. It was first approved in October.

Treasury has already committed $350 billion under the TARP, largely to shore up the balance sheets of large banks, but critics say the banking industry remains in desperate straits.

"The first round of TARP didn't give (Bank of America) the ability to build tangible equity, as well as fund Merrill Lynch, as well as handle loan losses and get rid of the problems on their balance sheets," said Christopher Marinac, an analyst at FIG Partners in Atlanta, Ga.

"The reality is that they need more common equity -- TARP may not be enough."

Bank of America and Merrill Lynch together received $25 billion from the TARP in October.

On Thursday, the U.S. House is expected to vote on a bill that would impose stricter terms and conditions on banks that want TARP money. A number of lawmakers who backed the initial TARP funding last year faced voter backlash in the November 4 congressional election.

As of Tuesday, the Treasury Department had paid out $271.7 billion from the initial $350 billion tranche of TARP, leaving a $78.3 billion balance in the bailout fund. All of the money, however, has been earmarked for various uses.