BofA to end $118 billion asset-guarantee deal

By Joe Rauch

NEW YORK (Reuters) - Bank of America Corp will pay $425 million to end a program to share losses on bad assets and derivatives with the United States, the bank said, marking its latest effort to extract itself from its fraught relationship with the government.

The bank and the government informally agreed to share losses on a $118 billion portfolio in January, soon after Bank of America's acquisition of Merrill Lynch & Co, but never signed an official agreement.

Analysts and investors said the bank paid more to exit the program than they had expected, perhaps signaling its eagerness to repay its $45 billion of government funds as soon as possible.

"The government has them over a barrel," said Gary Townsend, chief executive of Hill-Townsend Capital in Chevy Chase, Maryland. The firm holds both common and preferred stock in the bank.

Jefferson Harralson, a Keefe, Bruyette & Woods Inc banking analyst, said the precise size of the fee was not likely important to the bank.

"BofA doesn't care if this is $250 million or $425 million," he said. "The real negotiation is the TARP repayment issue behind the scenes, and you can't get there without this."

Bank of America Chief Executive Ken Lewis hopes to pay back the $45 billion the bank received under the Troubled Asset Relief Program as soon as possible. But analysts last week said banks like PNC Financial Services Group Inc could be better positioned to exit TARP first.

The Wall Street Journal reported in July that Bank of America is operating under a secret U.S. regulatory sanction that requires it to overhaul its board of directors and fix its risk and liquidity management, known as a memorandum of understanding. The bank named a new director, DuPont Co Chairman Charles Holliday, on Monday.

Bank of America is also facing myriad legal troubles regarding disclosures and bonuses linked to its January 1 purchase of Merrill Lynch & Co.

DEAL OR NO DEAL?

As part of the loss-sharing agreement, the bank would have had to pay an 8 percent dividend, or about $320 million a year, on $4 billion in preferred shares it would have given the government. The bank was also slated to give the government warrants.

Linus Wilson, a professor at the University of Louisiana at Lafayette, estimates that the warrants would have been worth about $331 million.

Under the terms of the original agreement, Bank of America would have absorbed the first $10 billion in losses, and the U.S. government would have absorbed the next $10 billion. For the remainder of the covered assets, $98 billion, the losses would have been covered 90 percent by the U.S. government.

The agreement limited Bank of America's potential losses on the $118 billion portfolio to a maximum of about $20 billion.

Citigroup Inc entered into a similar loss-sharing agreement with the U.S. government on a roughly $300 billion portfolio that it has not attempted to exit.