Bank of America (NYSE:BAC) annouced Wednesday that they will repay the $45 billion it received from the TARP in 2008. According to Greg Farrell and Justin Baer, at ft.com (here), BAC will use $26.2 billion in available cash and raise $18.8 billion in additional capital to cover the payment.
The $18.1 billion in capital will be raised with the issuance of "common equivalent securities", according to Sue Chang at The Wall Street Journal's MarketWatch.com (here). Also from Chang: "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," said the financial firm in a statement. Another item mentioned by Chang is a plan for BAC to sell $4 billion in unspecified assets.
According to Market Currents on Seeking Alpha at 5:44 pm, the deal was engineered by Greg Curl, the cheif risk officer for BAC. Curl is considered one of the candidates to succeed Ken Lewis as CEO.
Closing out the TARP arrangement will result in dividends paid to the government by BAC of about $3.6 billion. BAC has already paid the government $2.54 billion in dividends on TARP investments, according to Associated Press business writer Sara Lepro. Lepro says (here) that there is still an open question of whether BAC will be repurchasing warrants associated with the TARP that would allow future purchase of BAC stock at a specified price. A warrant is like an option to buy with no expiration date.
One of the reasons for closing out the TARP might be the recruitment of a new CEO to replace Ken Lewis, who is retiring. By repaying TARP funds, BAC will remove its compensation from the review of the pay czar. The company may feel that the chances of getting the person they want will improve if there is no oversight beyond the Board of Directors for compensation.
In case you think that BAC is lining up all its ducks, there is lack of unanimity on the future of the company. Eric Jackson, senior contributor at TheStreet.com has an article today entitled "Bank of America Has No Succession Plan" (here). Jackson writes that the current problems in finding a replacement for Lewis stem from poor succession planning by the company. The problem is attributed by Jackson to the holdover of many board members from the days of Hugh MColl, who built Bank of America from a small regional bank to the giant managed be his successor, Ken Lewis.
Jackson sites reports that several candidates to replace Lewis have expressed the opinion that BAC should be broken up to create more easily managed independent businesses. This is reportedly not sitting well with the board members that are mentally still living in the go-go growth years.
Apparently there are executives in the field of finance who recognize that the future of a successful finance sector lies with the absense of too big to fail concerns.
Disclosure: Author holds no positions in BAC but does own SKF.