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Kamakura Blog

May 25

Written by: Donald van Deventer
5/25/2011 2:24 AM 

Today’s blog focuses on the consolidated funding shortfall experienced by Bank of America and two companies profiled in earlier blogs, Merrill Lynch and Countrywide Financial Corporation. In previous blogs, we have analyzed the funding shortfalls for each company separately, but in this blog we consolidate them to show clearly how the announcements of acquisitions of Countrywide and Merrill Lynch dramatically increased the funding shortfall at Bank of America.

This is the fifth case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, and Merrill Lynch. The dates of the earlier blogs are given here:

van Deventer, Donald R., ”Case Studies in Liquidity Risk: AIG,” Kamakura blog,, May 16, 2011

van Deventer, Donald R., “Case Studies in Liquidity Risk: Bank of America,” Kamakura blog,, May 17, 2011

van Deventer, Donald R., ”Case Studies in Liquidity Risk: Countrywide Financial,” Kamakura blog,, May 18, 2011

van Deventer, Donald R., ”Case Studies in Liquidity Risk: Merrill Lynch,” Kamakura blog,, May 20, 2011

It would be a mistake for an analyst to measure the liquidity risk of Bank of America solely on a stand-alone basis, which we did in our May 17, 2011 blog.  By announcing its intention to acquire Countrywide Financial and Merrill Lynch, Bank of America both dramatically increased its credit risk and, as a result, its liquidity risk.  After the announcements of the intended acquisitions of Countrywide (January 11, 2008) and Merrill Lynch (September 14, 2008), both firms were forced to borrow dramatic amounts of money from the Federal Reserve as documented in our blogs of May 18 and May 20, 2011.  Bank of America could only avoid these incremental funding shortfalls by terminating the merger agreements before the July 1, 2008 close (Countrywide) and January 1, 2009 close (Merrill Lynch). Otherwise, the funding shortfalls of Countrywide and Merrill Lynch would have to be funded by Bank of America or “some other source” upon closing of the mergers. As we show below, “some other source” namely the citizens of the U.S. via the Capital Purchase Program, was desperately needed.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base.

The data used for all three firms in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included, but we discuss the Capital Purchase Program impacts below.  

This blog entry lists the borrowing by Bank of America, Countrywide Financial and Merrill Lynch that was identified by the Fed as “primary, secondary, or other extensions of credit” between February 8, 2008 and March 16, 2009.  Borrowings under this facility clearly represent a funding shortfall and an excellent measure of the degree to which liquidity was insufficient. A number of key events for the three firms are noted in this recent blog:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog,, May 13, 2011.

The consolidated key dates for Bank of America, Countrywide, and Merrill Lynch are excerpted below.  The “Levin Report” refers to the bi-partisan study of the root causes of the credit crisis submitted to the U.S. Congress on April 13, 2011:

April 30, 2006
In an April memo discussing Countrywide’s issuance of subprime 80/20 loans, which are loans that have no down payment and are comprised of a first deed loan for 80% of the home’s value and a second deed loan for the remaining 20% of value, resulting in a loan to value ratio of 100%, Countrywide CEO Angelo Mozilo wrote “In all my years in the business I have never seen a more toxic pr[o]duct.” (Source: Levin report, page 232).
June 20, 2007
Merrill Lynch seizes $850 million in assets from the two Bear Stearns hedge funds. Merrill tries to auction the bonds, but the auction fails
July 24, 2007
Countrywide Financial announces 33% drop in second quarter profits and says subprime mortgage problems were spreading to conventional home loans (Source:
August 16, 2007
Countrywide taps $11.5 billion commercial paper back up line (source: Bloomberg)
August 24, 2007
Bank of America buys $2 billion in Countrywide Financial preferred stock (Source:
October 5, 2007
Merrill Lynch writes down $5.5 billion in losses on subprime investments (source: Reuters)
October 15, 2007
Citigroup and Bank of America announce “CP rescue fund” (source: Bloomberg)
October 18, 2007
Bank of America writes off $4 billion in losses (source: Bloomberg)
October 24, 2007
Merrill Lynch writes down $7.9 billion on subprime mortgages and related securities (source: Bloomberg,
October 26, 2007
Countrywide reports first loss in 25 years, losing $1.2 billion in the third quarter (Source:
October 30, 2007
Merrill Lynch CEO O’Neal fired (source: Reuters)
November 13, 2007
Bank of America and SunTrust prop up money market funds (source: Bloomberg)
November 13, 2007
Bank of America says it will have to write off $3 billion in bad debt (Source:
January 11, 2008
Countrywide announces sale to Bank of America (Source: Levin report, page 47).
January 17, 2008
Merrill Lynch announces net loss of $7.8 billion for 2007 due to $14.1 billion in write-downs on investments related to subprime mortgages. (Source:
July 1, 2008
Countrywide acquisition closes (Source: Wall Street Journal)
July 29, 2008
Merrill Lynch sells $30.6 billion in CDOs for 22% of par value (Source: Reuters)
September 14, 2008
Lehman Brothers files for bankruptcy (Source: Reuters)
September 14, 2008
Bank of America announces acquisition of Merrill Lynch (Source: Reuters)
January 1, 2009
Bank of America merger with Merrill Lynch closes (source:

The primary, secondary, or other extensions of credit by the Federal Reserve to Bank of America, Countrywide and Merrill Lynch during the period February 8, 2011 to March 16, 2009 were summarized in the three blogs listed above. Their consolidated borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowings March 10, 2008 but large borrowings began March 24, 2008 and continued through the close of the Countrywide acquisition on July 1, 2008 and then began again September 17, 2008 and continued through the end of the Fed data on March 16, 2009.
Average from
2/8/2008 to 3/16/2009
$14.1 billion
Average when Drawn
$10.1 billion
Maximum Drawn
$48.1 billion
Borrowing Days
288 days

Kamakura Risk Information Services version 5.0 Jarrow-Chava default risk models showed the following pattern for the 1 year default probability of Bank of America versus the 1 year default probability for Countrywide Financial Corporation over the period of the Fed borrowing data, February 8, 2008 through March 16, 2009. The Countrywide default probability (yellow line) ends with the close of the acquisition by Bank of America on July 1,  2009:  

The following graph shows the same 1 year default probabilities for Bank of America (blue line) and Merrill Lynch (“BAC2,” yellow line) and highlights the very high correlation between Merrill Lynch default risk and Bank of America default risk after the acquisition was announced on September 14, 2008. Note that the combined firms suffered higher default risk than either had experienced separately after the close of the acquisition on January 1, 2009:

The borrowings from the Federal Reserve start in large volume at Countrywide on March 24, 2007 and remain outstanding until the July 1, 2008 acquisition of Countrywide on July 1, 2008. Just before the close of the acquisition, Bank of America was forced to borrow from the Fed in its own name. Borrowings began again on September 17, 2008 with an initial borrowing of $4.7 billion at Merrill Lynch, indicating that (even after the September 14 announcement of the acquisition by Bank of America) Merrill could no longer fund itself completely. Borrowing from the Fed at the pro forma combined Merrill Lynch and Bank of America peaked at $48.1 billion on October 14, 2008, and then declined gradually. Bank of America received $15 billion under the emergency Capital Purchase Program on October 28, 20081.  $10 billion was invested in Merrill Lynch under this program and was transferred to Bank of America on January 9, 2009, and an additional $20 billion was invested in Bank of America under the program on January 20, 2009, for a total investment of $45 billion. This explains the amount of the drop-off in direct borrowing from the Fed through March 2009.  A total of $23 billion was also borrowed by the soon-to-merge Bank of America and Merrill Lynch on October 27 and 29, 2008 under the Commercial Paper Funding Facility shown below.

Beginning with the close of the Merrill Lynch acquisition on January 1, 2009, remaining funding in the name of Merrill Lynch was taken over by Bank of America in its own name. Borrowings trended downward gradually after that, even post the January 1, 2009 acquisition by Bank of America.  With the exception of a 4 day period in February, 2009 (which appears to be a failure by the Fed to report borrowings under the Primary Dealer Credit Facility on 2 business days), the combined Bank of America and Merrill Lynch continued to borrow through the end of the Federal Reserve data series on March 16, 2009, not counting the $45 billion injected under the CPP program.  

In addition to these borrowings (“primary, secondary or other extensions of credit” from the Federal Reserve), Bank of America and Merrill Lynch sought support from the Commercial Paper Funding Facility run by the Federal Reserve on one occasion each. The Merrill Lynch and Bank of America commercial paper programs, both of which took place almost simultaneously with the Capital Purchase Program injection, were as follows:

Implications of Funding Shortfall Data

The consolidated analysis of the liquidity risk of Bank of America, Countrywide, and Merrill Lynch shows quite clearly that, without the borrowing capabilities from the Federal Reserve and the subsequent refinancing of those borrowings with $45 billion in capital injections under the Capital Purchase Program beginning on October 28, 2008, Bank of America would probably not have avoided complete failure or nationalization.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
May 25, 2011

© Copyright 2011 by Donald R. van Deventer.  All Rights Reserved.

1 Source: U.S. Treasury, Office of the Special Inspector General of the Troubled Asset Relief Program, "Emergency Capital Injections Provided to Support Bank of America, Other Major Banks, and the U.S. Financial System," October 5, 2009.