Bank of America to Exit Deal with Gov't

In this Sept. 15, 2008 file photo, traffic passes a branch of the Bank of America in New York.
AP Photo
Bank of America reached an agreement Monday to pay the United States $425 million to exit a costly arrangement whereby the government would have shouldered losses on risky assets from the bank's takeover of Merrill Lynch.

The fee, which comes after weeks of haggling, will be paid to the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. It's part of a larger move by Bank of America to get out from under the government's thumb.

Bank of America is paying the fee to exit an arrangement in which the government had promised to cover $118 billion in risky assets Bank of America acquired in the Merrill Lynch deal earlier this year. The arrangement was never used, but the government has argued that the bank benefited from the promise of protection.

By ending the arrangement, Bank of America will be able to avoid costly fees. It would have had to pay Treasury about $320 million a year in dividends. In addition, it would have had to pay more than $230 million in fees on the risky assets the government was backstopping.

"We are pleased to resolve this matter and move forward," Kenneth Lewis, chief executive officer of president of the North Carolina-based Bank of America, said in a statement.

Treasury said it was satisfied, too.

"It's an encouraging sign of increased stability in the financial system that Bank of America was able to move ahead without the extraordinary assistance that the government was willing to provide through this asset guarantee arrangement," said Treasury spokesman Andrew Williams. "And taxpayers will receive $425 million in fees for being willing to provide this support."

Bank of America has received a total of $45 billion from the Treasury's $700 billion financial bailout pot, which is financed by taxpayers.

The company says it wants to repay $20 billion of that money, which would remove the company from a list of firms that have received "exceptional" assistance from the government.

Such companies are subject to greater government scrutiny, including having to provide plans outlining compensation packages for their highest-paid employees. The Obama administration's pay czar, Kenneth Feinberg, has the power to veto them.

Separately Monday, the Securities and Exchange Commission said it will go to trial against Bank of America over bonuses at Merrill Lynch, opening the possibility of also bringing charges against bank executives, a week after a judge's stinging rejection of a $33 million settlement of the case.

The SEC said it will "vigorously pursue" its case against Bank of America, which acquired Merrill in a hastily arranged deal a year ago. The agency had accused the bank, one of the biggest U.S. financial institutions, of failing to disclose to shareholders that it had authorized Merrill to pay up to $5.8 billion in bonuses.

The SEC has been weighing its options since U.S. District Judge Jed Rakoff called the proposed settlement a breach of "justice and morality" and ordered the case to trial. Another route would have been to try to renegotiate the accord with Bank of America.

"We firmly believe that the settlement we submitted to the court was reasonable, appropriate and in the public interest," the SEC said in a statement issued Monday night. The agency had made that argument in briefs filed in recent weeks to Rakoff. Bank of America also had defended the settlement as appropriate.

Rakoff had questioned why individual executives at Charlotte, N.C.-based Bank of America weren't charged by the SEC. His unprecedented rejection of the settlement put the SEC in a touchy legal situation. The agency on Monday notified the federal court in Manhattan, where Rakoff issued his ruling a week earlier, that it had decided to proceed to trial in the case.

The SEC said it could seek to bring additional charges if supported by the record of evidence that develops in the trial, meaning that it could seek to charge individual executives.

"As we consider our legal options with respect to the court's ruling, we will vigorously pursue our charges against Bank of America and take steps to prove our case in court," the SEC statement said. "We will use the additional discovery available in the litigation to further pursue the facts and determine whether to seek the court's permission to bring additional charges in this case. In deciding how to proceed we will, as always, be guided by what the facts warrant and the law permits."

Bank of America spokesman Scott Silvestri had no immediate comment.

Bank of America agreed to pay the $33 million in the settlement without admitting or denying wrongdoing. The bank has said it didn't violate disclosure rules but wished to avoid litigation with the SEC at a time of market uncertainty.

Rakoff, in his ruling, found that the settlement "suggests a rather cynical relationship between the parties."

"The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth," he wrote.