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Bank of America Corp. (NYSE: BAC), the nation's biggest lender, reached an agreement to repay $45 billion of Troubled Asset Relief Program (TARP) bailout funds, removing government imposed restrictions on executive pay that have hindered its search for a new CEO.
The Charlotte, N.C., bank will become the first bank to return a large, or "exceptional," taxpayer-funded bailout. Bank of America initially received $25 billion of TARP funding in October 2008 as government officials raced to stabilize the U.S. financial system. The government injected the bank with an additional $20 billion in January to mitigate losses associated with its takeover of securities firm Merrill Lynch & Co. (NYSE: MER).
The bank will use $26.2 billion of "excess liquidity" and $18.8 billion from the sale of securities to repay the TARP funds according to a statement issued late Wednesday.
The repayment will clear the way for the bank to intensify its efforts to replace Chief Executive Officer Kenneth D. Lewis, who announced in September he would retire at the end of this year.
Under restrictions imposed as a condition of the TARP loans, Bank of America's executive pay and bonuses have been subject to scrutiny by Kenneth Feinberg, the Treasury Department's special master for compensation.
The executive compensation restrictions have hindered the search for Lewis's successor, people familiar with the process told The Wall Street Journal.
One potential candidate, PNC Financial Services Vice Chairman Bill Demchak, rebuffed feelers from an executive recruitment firm because of Feinberg's veto-power over compensation packages, according to The Journal.
"This is huge for Bank of America's ability to attract a new CEO," Jaime Peters, an analyst at Morningstar Inc. (Nasdaq: MORN), told Bloomberg. "No longer will they have to say we don't know how much we can pay you unless some guy in Washington D.C. tells us."
Even though loan losses ballooned as the recession intensified, the bank was able to report a $6.47 billion profit for the first three quarters of 2009. With its newfound health, the bank has been petitioning the government for permission to repay the loans. However, government officials held off until they were convinced the bank could repay the loans without returning for additional funding.
"We are pleased that Bank of America is moving ahead with plans to pay the taxpayers back in full," a U.S. Treasury official told Reuters. "As banks replace Treasury investments with private capital, confidence in the financial system increases…(and) government's unprecedented involvement in the private sector lessens."
The planned repayment will remove the yoke of Feinberg's pay review, but it will still be subject to a "look-back" provision that allows Feinberg to claw back money if he determines payments have been made that don't serve the public interest, according to The Journal.
The repayment will increase pressure on the other large recipients of TARP funds including Wells Fargo & Co. (NYSE: WFC), which received $25 billion, and Citigroup Inc. (NYSE: C), which has received $45 billion, to remove themselves from government oversight.
Goldman Sachs Group Inc. (NYSE: GS), J.P. Morgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS) and a bevy of midsize banks have now repaid more than $70 billion to the Treasury. But among large commercial banks, only Bank of America and Citigroup received "exceptional" assistance from the government.
News & Related Story Links:
- Wall Street Journal:
BofA Set to Repay Taxpayers
Bank of America TARP Payment May Aid Shares, Search for Chief
U.S. Treasury praises Bank of America payback