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Bank of America to Repay TARP Debt; Hold the Champagne

A whiff of triumph -- and self-congratulation -- pervades Bank of America's Wednesday night announcement that it will refund the "entire" $45 billion in loans taxpayers made to the company.

The entire amount? Kudos.

"As America's largest bank, we have a responsibility to make good on the taxpayers' investment, and our record shows that we have been able to fulfill that commitment while continuing to lend," said B of A chief Ken Lewis in a statement.
It's certainly good news that B of A (BAC) is now solvent enough to repay its TARP obligations. That indicates that the U.S. financial system, brought to the edge of collapse last year, is healing.

Yet it's hard to get too jazzed about a megabank repaying its debt to society when thousands of smaller banks around the country -- institutions unblessed by government largess -- fight for survival. And, it almost goes without saying, when millions of Americans struggle to cope with a crisis caused in part by companies like B of A.

Besides, B of A's move to return the money has less to do with fulfilling its duty to taxpayers than it does with freeing itself from federal compensation limits related to TARP. The company is under intense pressure to hire a new CEO to replace the departing Lewis, who's set to exit by year-end. And it's not having an easy time of it. With the government out of its books, B of A can tee up the kind of offer that top bank CEOs have come to expect.

The move also underscores how quickly most of the big banks have recovered. B of A will repay its loans with $18.8 billion raised in a stock offering, with the balance paid in cash. That's a message to investors that the company is confident about the future.

And for good reason. Whomever takes the helm at B of A will inherit among the strongest financial companies in America. Few banks can match its broad commercial and investment banking platform, diverse business mix, and sheer revenue-generating power. In the short term, the company's loan portfolio will continue to bleed. But those credit losses are slowing. Said Wells Fargo analysts in a recent research note:

"Over time, we believe [B of A's] strong market positions in deposits, credit cards, mortgages, commercial and investment banking should generate superior earnings versus its peers."
But let's not forget, as Congress deliberates over the need for systemically dangerous banks, what was required to preserve those market positions. B of A is emerging from the banking crisis a stronger company not because of its leadership, but in spite of it -- and because of an extraordinary level of government support.

Let's also hope the company's next leader does a better job.

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