If nothing else, Bank of America Corp. gets points for sheer guts.
The Charlotte company is walking away from a deal that puts the government on the hook for up to $97 billion of losses, opting to forge ahead without a safety net as it slowly tries to pry itself out from under Uncle Sam's thumb.
The decision may signal improving fundamentals since B of A cut the loss-sharing pact as part of a deal with the government to proceed with its acquisition of Merrill Lynch & Co. Inc.
But if the economy fails to regain its footing or plunges further, giving up the protection could prove costly.
"Obviously, they are trying to take every step that they can to get away from the government," said Nancy Bush at NAB Research LLC. "I would think it would be to the regulators' advantage to see the bank getting back to a more normal status."
As for whether B of A is making the right choice, "we won't really know until yearend," she said.
Kenneth D. Lewis, its chief executive, characterized the decision to abandon the agreement as a critical step in weaning his company from substantial governmental assistance.
"I think the first step in not being 'special' would be to get finality" on the loss-sharing arrangement, he said Thursday during a call with analysts to discuss results of the government's stress test. "The closer you then get to repaying all the [Tarp] money, the less special you get."
"Special" is the word the government has used to describe the assistance it is giving B of A and Citigroup Inc., which also came back for a second round of capital and negotiated a loss-sharing agreement.
All financial companies that accepted capital under the Troubled Asset Relief Program are subject to various restrictions, but B of A and Citi are often lumped together as the weakest.
So ending the loss-sharing deal could help B of A distance itself from Citi and could give Lewis more breathing room in the corporate suite; the Obama administration has reserved the right to remove managers of companies that rely heavily on government assistance.
Vikram Pandit, Citi's CEO, made no mention of its $301 billion loss-sharing agreement while discussing its stress test results Thursday.
A source close to Citi said Friday that the $2.02 trillion-asset company, which issued $7 billion of preferred stock to finalize its pact, has no plans to exit the program, even though it is "nowhere near" hitting thresholds where government coverage would need to kick in.
The fact that B of A has never actually finalized its $118 billion pact with the federal government might make it easier to end.
Few observers question the initial logic for pursuing the arrangement.
In December, when the discussion began, the global economic system seemed on the verge of meltdown. B of A also started to panic as losses mounted at Merrill before the acquisition was completed Jan. 1.
But the government's backstop is not cheap.
Under the unsigned term sheet, B of A would cover the first $10 billion of losses, and the government would cover 90% of the rest. In exchange, the company would issue $4 billion of preferred stock with an 8% dividend, or $320 million a year.
During a conference call Thursday, Joe Price, B of A's chief financial officer, said that the aggregate level of exposure has been reduced.
"I would say we're not just feeling better about the assets, but we're shrinking the size of it," he said. "In other words, the exposure is down."
It remains unclear if the Treasury Department will allow B of A to opt out.
However, the company's proposal is likely to be part of a plan it must file by June 8 that outlines how it would fill the $33.9 billion hole identified by the stress test.
To that end, B of A registered Friday with the Securities and Exchange Commission to sell 1.25 billion common shares. In October, Bank of America registered 455 million shares of common stock to raise about $10 billion. According to its prospectus filed Friday, the new offering will price stock at a maximum of $8.79 a share to raise about $11 billion.
The company's relationship with its regulators has been turned inside out by testimony that Lewis gave New York Attorney General Anthony Cuomo, who is investigating how the Merrill deal was completed.
When questioned about the final negotiations, Lewis told Cuomo that federal officials had threatened to have him fired if he did not follow though and close on the Merrill deal.
"The government has proven itself a horrible business partner," said Gary Townsend, the CEO at Hill-Townsend Capital LLC. "They can always strong-arm Bank of America."
Another observer, who asked not to be named, asked whether Lewis "piss[ed] the regulators off enough for them to put the screws to him" by forcing the completion of the loss-sharing pact. "There is certainly no business sense for keeping it in place, especially since those assets had to be reviewed under the stress test."
During a call with reporters Thursday, Price said that regulators seem amenable. "There is receptivity, but it will take some time."
He also said the two sides had been negotiating terms since the initial pact was made in January.
