Bank of America to Repay Bailout, Easing CEO Search

By David Mildenberg

Dec. 3 (Bloomberg) -- Bank of America Corp., the nation’s biggest lender, will repay $45 billion of U.S. government bailout funds, helping free the bank from curbs on executive pay that have hampered its search for a new leader.

The bank will repay the Troubled Asset Relief Program using $26.2 billion of “excess liquidity” and $18.8 billion from the sale of securities, according to a statement. The firm plans to increase equity by $4 billion through asset sales, and will issue $1.7 billion of restricted stock instead of year-end bonuses to some employees.

Bank of America’s two rounds of U.S. funding included $20 billion to help cushion losses tied to the takeover of Merrill Lynch & Co. The planned repayment will ease the bank’s effort to replace Chief Executive Officer Kenneth D. Lewis, who announced his departure in September.

Dilution for shareholders will be “substantial,” said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1 billion, including Bank of America shares. “It looks like this was done for the incoming chief executive,” he said. “You take out the compensation restrictions and everything else that went along with the government ownership.”

Bank of America, based in Charlotte, North Carolina, rose to $16.23 in German trading today, up 3.7 percent from its $15.65 close in New York yesterday. The shares have gained 11 percent this year on the New York Stock Exchange after plummeting 66 percent in 2008.

Curl, Price

The repayment was negotiated by Chief Risk Officer Greg Curl and Chief Financial Officer Joe L. Price, a person familiar with the matter said. The two executives had approval from the board to close the deal once regulators including the Treasury, the Federal Reserve and the Office of the Comptroller of the Currency agreed to it, the person said, speaking anonymously because the details of the talks aren’t public.

Bank officials have cited Curl, 61, as one of two internal candidates most likely to succeed Lewis and his role in negotiating the exit from TARP makes him the favorite, said Anthony Polini, an analyst at Raymond James Financial Inc. While the board continues the search process, the agreement enhances Curl’s prospects, said a person familiar with the process.

No decision has been made with both internal and external candidates under consideration, spokesman Robert Stickler said in an interview. “It removes the stigma we’ve had as a company,” he said.

Limits on Pay

Repaying TARP funds removes Bank of America from limits on compensation required by Kenneth Feinberg, the U.S. special compensation master, Stickler said.

“This is huge for Bank of America’s ability to attract a new CEO,” said Jaime Peters, an analyst at Morningstar Inc. “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.”

At least four external candidates, including Citigroup Inc. director Michael O’Neill and Bank of New York Mellon CEO Robert Kelly, rebuffed approaches.

Ending TARP saves $3.6 billion a year in dividend payments, which may help boost earnings next year, Raymond James’s Polini said in an interview. It also means CEO Lewis, 62, can fulfill his vow to arrange the return of all bailout funds before his tenure ends at the end of the year. Lewis endured criticism from lawmakers, regulators and shareholders about his handling of the Merrill Lynch purchase.

JPMorgan Competition

“We appreciate the critical role that the U.S. government played last fall in helping to stabilize financial markets, and we are pleased to be able to fully repay the investment, with interest,” Lewis said in the statement.

The move helps Bank of America compete with rivals including JPMorgan Chase & Co., which already repaid bailout funds, Stickler said.

Bank of America’s plan will reduce income available to common shareholders in the fourth quarter by $4.1 billion, the company said. Terms call for issuing “common equivalent securities,” and shareholders will be asked to approve an increase in authorized shares so they could be converted into common stock. The new securities have warrants to buy a total of 60 million shares of common stock at a penny a share if stockholders don’t vote to approve the increase.

‘Bitter Pill’

The asset sales, designed to boost equity, must be in contract and approved by the Federal Reserve by June 30, Bank of America said. If the sales aren’t completed by the end of 2010, the bank agreed to sell common equity.

The plan calls for the bank to buy back 1.8 million preferred shares sold to the Treasury Department. For now, the bank isn’t buying back warrants also awarded to the U.S., Bank of America said. The warrants are worth from $943 million to $2.5 billion, depending on the type of valuation used, said Linus Wilson, a finance professor at the University of Louisiana at Lafayette who has studied TARP.

Bank of America is offering the common equivalent securities because it doesn’t have stockholder authority to issue enough shares to raise the $18.8 billion of common equity, Stickler said. The sale is commencing immediately, he said.

“It’s a bitter pill, but longer term it outweighs the hit to the stock,” said Matthew McCormick, a banking analyst and portfolio manager at Bahl & Gaynor Inc. in Cincinnati, which oversees $2.5 billion. “I thought it would take longer than this for Bank of America to get out of it. It shows that the government couldn’t attract anyone of substantial talent unless they paid a fair wage.”

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net