Wednesday, Bank of America Corp. (BAC) said it would repay the U.S. Treasury the whole of $45 billion debt that it received under the Troubled Asset Relief Program or TARP. The repayment will be made after the completion of a securities offering. Bank of America would save about $3.6 billion in annual dividend costs from the TARP investment, once it made the repayment. As of now, the company has paid $2.54 billion in dividends to the U.S. Treasury on the TARP investment.
The TARP was set up last year to prop up the U.S. financial system after big bets on mortgage-related assets pushed many institutions toward collapse. Following the collapse of Lehman Brothers Holdings Inc. (LEHMQ.PK), as well as several other events that rocked the financial sector last year, the federal government stepped in, providing bank holding companies access to the $700 billion rescue plan.
Bank of America, the largest U.S. bank, received funds from the federal government under TARP, partly to help cover its losses arising from the acquisition of securities firm Merrill Lynch & Co. in January 2008. The company at the time of receiving the bail-out funds said it hoped to repay the money within the next couple of years.
However, there were lot of restrictions for the banks in repaying the TARP fund, with the government insisting on stress test clearance to ensure the banks stand-up to any further deterioration in the economy. The tests found that if the recession were to worsen, losses at the nineteen banks during 2009 and 2010 could total $600 billion. The banks involved in the exercise account for two-thirds of the assets and more than half the loans in the U.S. banking system.
The banks that cleared the stress test also raised funds in order to quickly pay back the TARP bail-out funds. One of the biggest reasons for the banks to quickly repay the money is to free it from restrictions enforced on it by the government.
With the repayment of TARP funds, banks would be able to function independently and without government scrutiny, as well as any unnecessary restrictions on bonus payments and salaries to executives. Financial institutions that received funds under TARP, had also reported client concerns of being under the government's thumb.
Pursuant to the completion of the stress assessment, if permitted by supervisors and if supported by the results of the stress assessment, the banks had said it would like to use the capital raised plus additional resources to repay the tax-payers money it received from the U.S. government under the Capital Purchase Program.
During June 2009, major American banks including Morgan Stanley (MS), JPMorgan Chase & Co. (JPM), Goldman Sachs Group, Inc. (GS), U.S. Bancorp (USB) and BB&T Corp. (BBT), repaid the capital received as bail-out funds under the TARP.
Under terms of the TARP program, Bank of America issued 600 thousand of its fixed rate cumulative perpetual preferred stock, series N, 400 thousand of series Q stock and 800 thousand of series R stock to the treasury. Now, the company is required to repurchase all of the issued stocks from the Treasury in order to eliminate the government's involvement. Bank of America is not exercising its right to repurchase the related warrants at this time.
The Charlotte, North Carolina-based Bank of America will fund the TARP repayment by utilizing $26.2 billion in excess liquidity and $18.8 billion in proceeds from the sale of common equivalent securities.
The company said the $18.8 billion issuance of common equivalent securities would be treated as Tier 1 common capital, which would receive shareholders' approval, to increase its outstanding common shares to allow common equivalent securities to be converted into common stock. The common equivalent securities carry warrants to buy a total of 60 million shares of common stock at $0.01 per share and other benefits if shareholders do not approve an increase in authorized common shares.
BA decided to increase equity through various means, including $4 billion asset sales and issuing $1.7 billion of restricted stock to certain Bank of America associates as part of their normal year-end incentive payments.
After the TARP repayment and these initiatives, the company's Tier 1 capital ratio would be 11.0%, pro forma based on the September 30, 2009 ratio of 12.5%. The Tier 1 common capital ratio would be 8.5%, pro forma based on the September 30, 2009 ratio of 7.3%.
Repurchase of TARP preferred stock is expected to reduce income available to common shareholders in the fourth quarter by $4.1 billion, as the book value of the preferred is less than the amount paid.
The company has taken series of actions to check government's ownership in the bank, in which the repayment of TARP fund is the latest. The other action included paying the U.S. government $425 million to terminate a term sheet that would have guaranteed up to $118 billion in assets, if a final agreement had been reached.
Further, the company opted out of the temporary liquidity guarantee program or TLGP in September 2009, while exiting the term auction facility in the summer of 2009. The company also eliminated borrowings from the Federal Reserve's Term Securities Lending Facility and Primary Dealer Credit Facility. BA also increased Tier 1 common capital by about $40 billion in the second quarter of 2009, and issued more than $10 billion in non-government-backed debt in the public markets in 2009.
Commenting on the repayment decision, BA's chief executive officer and president, Kenneth Lewis said, "Adding TARP to our capital has allowed Bank of America to continue to support the economy. In the 12 months since the government first made its investment in Bank of America, our company originated $760 billion in new credit, or approximately $3 billion per business day."
The company said that with the TARP fund aid, it helped more than 1.54 million customers purchase a new home or refinance their existing mortgages and another 423,000 homeowners modify their loans to avoid foreclosure.
Year-to-date, BA has extended more than $12 billion in credit to small-business customers and assisted more than 49,000 small business card clients in improving their cash flows by modifying their payment structures.
BAC closed Wednesday's regular trading at $15.65, down $0.24 or 1.51%, on a volume of 129.39 million shares, lower than the three-month average volume of 178.54 million shares. However, the stock gained $0.39 or 2.49%, and traded at $16.04 in after hours. In the past 52-week period, the stock has been trading in a broad range of $2.53 to $19.10.
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June 12, 2026 17:14 ET Major central bank action was the focus this week in economic news. The European Central Bank became the first major central bank to move in response to the rising inflationary pressures in the backdrop of the conflict in the Middle East. In North America, the U.S. inflation and trade data as well as Canada’s central bank decision gained attention. The Chinese trade data was the main news in Asia.