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Bank of America’s repayment puts pressure on rivals

By Stevenson Jacobs
Associated Press / December 4, 2009

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NEW YORK - Bank of America’s surprise move to pay back $45 billion in federal bailout money ratchets up pressure on rivals Wells Fargo and Citigroup to get out from under the government’s thumb. But don’t expect it to happen anytime soon.

That’s because many banks, including Citi and Wells Fargo, still face big losses on loans as people fall behind on bills.

Moreover, the government may be reluctant to let them repay until they’re confident that no further assistance will be needed.

If the economy were to seriously weaken again, the government could be forced to inject more money into big banks.

Bank of America Corp. said Wednesday it will use available cash and raise $18.8 billion in capital to repay the money, which it received during the height of the credit crisis last year. It would become the first of seven companies that received exceptional government assistance - bailout funds beyond the initial Troubled Asset Relief Program injections - to pay back taxpayers in full.

In doing so, Bank of America would join JPMorgan Chase & Co., Morgan Stanley, and Goldman Sachs Group as large banks that have cut ties with the government - and broken free of limits on executive compensation and other restrictions. While those banks also have had steep loan losses, they’ve been able to offset much of the damage with strong profits in their trading divisions.

Bank of America in particular has been aided by profit from its wealth management business, which includes the bank’s Merrill Lynch division.

The TARP repayment helps the Charlotte, N.C., bank’s efforts to recruit a successor to chief executive Ken Lewis, who said he planned to retire Dec. 31.

But it also widens the competitive gap between banks that have repaid TARP funds and those that haven’t, said Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution.

“It puts more pressure on Citigroup and Wells to pay it back when they can - which is good,’’ Elliott said. “We want them to be under pressure to act.’’

Like other big banks, Citigroup and Wells Fargo & Co. have been beset by losses on loans from mortgages to credit cards as a growing number of consumers struggle to pay off debt.

Citigroup reported $8 billion in loan losses in the third quarter compared with $5.1 billion for Wells Fargo.

Citigroup has received $45 billion in federal aid and guarantees to protect against losses on more than $300 billion in risky assets. In return, the government got a 34 percent ownership stake in the banking giant.

Wells Fargo has received $25 billion in aid. Neither bank has given a timetable for repaying taxpayers.

Wells Fargo “will work closely with our regulators to determine the appropriate time to repay the government’s investment . . . while maintaining strong capital levels,’’ spokeswoman Julia Tunis Bernard said.

Appearing yesterday on Capitol Hill, Federal Reserve Chairman Ben Bernanke said regulators decided it was “safe and reasonable and appropriate’’ for Bank of America to repay its bailout funds.

The bank has paid $2.54 billion to the government so far in dividends on the TARP money.