The Charlotte, North Carolina-based banking leader, is expected to repay its Troubled Asset Relief Program (Tarp) funds over the next few days.
A US treasury official called the repayment a step in the right direction, adding that replacing treasury investments with private capital would provide a boost to confidence.
Degree of risk
While the agreement sent Bank of America shares higher after-hours, it comes with a degree of risk.
Many investors remain concerned that without the government's backing, the bank could struggle again if the economy were to take a turn for the worse.
"I didn't think they were in any position to repay Tarp. I was looking for that in another 12 to 18 months," Bill Fitzpatrick, an analyst at Optique Capital Management, said.
"Given all the risks that are still embedded in the economy, it's more prudent to beef up your capital levels. "
Under the agreement's terms, the bank will issue up to $18.8 billion in securities that will convert into common stock once shareholders approve an increase in the bank's shares. The remainder of the $45 billion would be repaid through $26.2 billion in cash.
The bank is repurchasing all of its outstanding shares under the Tarp program, but not repurchasing the warrants.
Treasury rules indicate that Bofa will be free from Tarp restrictions once it has repaid the capital investment, even if the government still holds the bank's warrants.
Bob Stickler, a company spokesman, said: "Our goal was to meet our obligation to taxpayers. We see this as a victory for the government's program, as it did what it was intended to do."
Searching for a successor
Kenneth Lewis, the outgoing CEO who is expected to step down from his post by the end of 2009, has said in the past that repaying the government was something he wanted to accomplish before stepping down.
Bank of America has been searching for a successor to Lewis since it announced in late September that Lewis planned to retire on December 31.
Greg Curl, Bofa’s chief risk officer, negotiated the deal and has been considered a leading contender to replace Lewis.
Curl played an instrumental role in gaining the government's permission to repay the Tarp funds, a move that could bolster his chances as a contender for the CEO position, according to financial industry sources.
"It's a feather in his cap," said Anton Schutz, the president of Mendon Capital in Rochester, New York.