Bank of America to repay U.S.
Thursday, December 3, 2009
Bank of America said Wednesday that it would repay $45 billion in taxpayer aid that helped the company survive the financial crisis, a step that would terminate the federal pay restrictions that have inhibited its search for a new chief executive.
The company would become the first recipient of extraordinary federal assistance to repay taxpayers completely. Several banks including J.P. Morgan Chase and Goldman Sachs have repaid capital handed out by the government last fall, but Bank of America is one of nine companies that needed additional help. The others include Citigroup, GMAC and automakers General Motors and Chrysler.
Bank of America chief executive Kenneth Lewis, who plans to retire at the end of the year, said the repayment showed the strength of the company, which operates the nation's largest bank, and the improving health of the broader economy.
"It is a milestone indicating that public policy has succeeded in helping our industry and the economy begin to recover," Lewis said.
Financial analysts had expected that Bank of America would not recover sufficient financial strength to repay the government until next year. The Obama administration has said that it would not accept repayments from companies unless it was sure they would remain in good health. But Bank of America said it had agreed to raise additional capital from private sources to address that concern.
"We are pleased that Bank of America is moving ahead with plans to pay the taxpayers back in full," a Treasury Department spokesman said Wednesday. "As banks replace Treasury investments with private capital, confidence in the financial system increases, taxpayers are made whole, and government's unprecedented involvement in the private sector lessens."
Bank of America entered the financial crisis with a reputation as one of the nation's strongest and best-managed banks. Then in September 2008 Lewis made a fateful decision to buy the troubled investment bank Merrill Lynch. By the end of the year, spiraling losses at Merrill and growing problems within Bank of America led Lewis to accept a federal bailout. The government gave Bank of America $20 billion in new capital, on top of $25 billion in taxpayer aid it had already taken, and also guaranteed to limit the company's losses on a portfolio of $118 billion in troubled loans.
The Merrill deal became the focus of multiple state and federal investigations, some focused on whether Lewis had concealed from shareholders critical information about the company's mounting losses. A rising tide of criticism led Lewis to announce his retirement in September.
The company's search for a new chief executive has since been hampered by the realities of its life as a ward of the state. Banking regulators have subjected the company to increased scrutiny, demanding improvements in risk management and the addition of people with financial experience to the board of directors. Even more problematic is that a federal official, Kenneth R. Feinberg, must approve compensation levels for senior executives.
Some candidates to replace Lewis have said they will not work under those conditions, according to a person familiar with the search.
Repaying the government in full would allow Bank of America to pay its next chief executive however many millions the board sees fit.
Feinberg said Wednesday that he would welcome repayment. "The primary objective of the statute and the regulations has always been to get the taxpayers repaid in full," Feinberg said. "If that is done, we have achieved our objective."
Bank of America said it would repay the government with $26.2 billion in accumulated cash and $18.8 billion raised from investors. In order to move forward quickly, the company said it would raise the money by selling securities that can later be converted to shares of common stock, and it would then seek permission from its shareholders to issue new shares to investors who buy the securities. Obtaining shareholder approval for the deal is largely a formality.
Issuing such a large volume of new shares will require a short-term sacrifice by existing shareholders, as the value of each outstanding share would decline, but it could be worthwhile in the long term if escaping government control helps Bank of America return to health. One immediate benefit: the company would no longer be required to pay $3.6 billion in annual dividends on the federal aid.
To address concerns about its health, Bank of America agreed to raise $4 billion in equity through the sale of business units by next summer. If the company cannot hit that target, it will have to raise the difference from investors.
Treasury still holds warrants to purchase Bank of America stock issued in connection with the federal aid. Bank of America said it would not seek to repurchase those warrants. While some companies have negotiated with Treasury to do so, others have allowed the government to auction the warrants to investors.
Staff writer David Cho contributed to this story.