Bank of America today said it would repay $45 billion of taxpayer bail-out funds, a move that could free the top US 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 marks a critical victory for outgoing CEO 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 US 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 Programme (TARP) funds over the next few days.
A US 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 the bank'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.
The news comes as the bank has bristled under US pay czar Kenneth Feinberg's curbs for senior management compensation. It has repeatedly expressed its interest in repaying the funds as soon as possible.
While the news 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.
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.
US Treasury rules indicate that Bank of America's 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.
