Bank of America Corp <BAC.N> said it would repay $45 billion of taxpayer bailout funds, a move that could free the top U.S. lender from pay curbs as it looks to hire a new CEO, but also makes it more vulnerable to further economic shocks.
The surprise agreement on Wednesday marks a critical victory for outgoing Chief Executive Kenneth Lewis who is expected to step down from his post by the end of the year, but has said that repaying the government was something he wanted to accomplish before stepping down.
The deal is also a shot in the arm for the U.S. Treasury, which has been under fire for the hundreds of billions in taxpayer dollars it has shelled out to corporate America during the financial crisis.
The Charlotte, North Carolina-based banking leader is expected to repay its Troubled Asset Relief Program (TARP) funds over the next few days.
A U.S. Treasury official called the repayment a step in the right direction, adding that replacing Treasury investments with private capital would provide a boost to confidence.
The deal was negotiated by BofA's chief risk officer, Greg Curl, sources said. Curl has been considered a leading contender to replace Lewis.
Curl played an instrumental role in gaining the government's permission to repay the TARP funds, a move that could bolster his chances as a contender for the CEO position, according to financial industry sources.
"It's a feather in his cap," said Anton Schutz, president of Mendon Capital in Rochester, New York.
The announcement comes as the bank has bristled under U.S. pay czar Kenneth Feinberg's curbs for senior management compensation. It has repeatedly expressed its interest in repaying the funds as soon as possible.
In an interview with Reuters, Feinberg called the bank's plan to repay TARP money "very satisfying" and said it was "exactly the goal" of his oversight.
While the agreement sent Bank of America shares higher after-hours, it comes with a degree of risk. Many investors remain concerned that without the government's backing, the bank could struggle again if the economy were to take a turn for the worse.
"I didn't think they were in any position to repay TARP. I was looking for that in another 12 to 18 months," said Bill Fitzpatrick, an analyst at Optique Capital Management in Milwaukee. "Given all the risks that are still embedded in the economy, it's more prudent to beef up your capital levels,"
MAKING THE DEAL
Under the agreement's terms, the bank will issue up to $18.8 billion in securities that will convert into common stock once shareholders approve an increase in the bank's shares. The remainder of the $45 billion would be repaid through $26.2 billion in cash.
The bank is repurchasing all of its outstanding shares under the TARP program, but not repurchasing the warrants.
Treasury rules indicate that BofA will be free from TARP restrictions and Feinberg's rulings once it has repaid the capital investment, even if the government still holds the bank's warrants.
"Our intention has always been to exit the exceptional assistance," said Bob Stickler, company spokesman. "Our goal was to meet our obligation to taxpayers. We see this as a victory for the government's program, as it did what it was intended to do."
