July 13 (Bloomberg) -- Bank of America Corp. is trying to avoid paying billions of dollars in fees to U.S. taxpayers for guarantees against losses at Merrill Lynch & Co., saying the rescue agreement was never signed and the funding never used.

Regulators contend Bank of America owes at least part of a $4 billion fee it agreed to pay in January -- even without a completed legal document -- because the company benefited from implied U.S. backing on about $118 billion of Merrill Lynch assets, such as mortgage-backed bonds, people familiar with the matter said. The Charlotte, North Carolina-based bank says it owes the Treasury nothing, according to the people, who declined to be identified because the negotiations are confidential.

Bank of America, ranked first by assets and deposits in the U.S., “got a moral commitment for insurance without tendering a check, so it appears they got something for nothing,” said Representative Brad Sherman, a California Democrat on the House Financial Services Committee. “If the government takes the risk, the government needs to be paid.”

Both sides are under pressure from lawmakers who questioned whether taxpayers are being adequately rewarded for propping up lenders, and why Bank of America’s January acquisition of New York-based Merrill Lynch required a publicly funded bailout. The U.S. provided the bank $20 billion in capital plus the asset guarantees to keep Chief Executive Officer Kenneth Lewis from abandoning the takeover of money-losing Merrill, once the world’s biggest brokerage.

Size of Sum

The sum demanded from Bank of America is likely to be smaller than the $4 billion described in terms of the agreement, according to one of the people.

An update on the program’s status may come July 17, when Bank of America reports second-quarter results, according to another person. Adjusted net income probably fell 31 percent to $2.44 billion, according to the average estimate of analysts surveyed by Bloomberg.

Both sides agree the accord was never signed and the funding went untapped, the people said. Bank spokesman Scott Silvestri and Treasury’s Andrew Williams declined to comment.

The guarantees were crafted after Lewis, 62, told regulators in December he might abort the takeover of Merrill as quarterly losses at the brokerage spiraled toward more than $15 billion. Regulators were concerned Merrill might collapse and send fresh shock waves through financial markets.

Bank of America disclosed the guarantees Jan. 16 along with its first quarterly loss in 17 years. The bank’s news release headlined the guarantee and called the program an “agreement.”

Loss Sharing

The plan called for the Federal Reserve, the Treasury, and Federal Deposit Insurance Corp. to participate in a loss-sharing plan for loans, mortgage-backed securities and financial instruments that could last 10 years, according to company and Treasury documents. Most of the holdings came from Merrill Lynch, acquired Jan. 1.

Bank of America would absorb the first $10 billion of losses, with U.S. agencies covering 90 percent of subsequent deficits, said the bank’s Jan. 16 statement. The bank “would pay a premium of 3.4 percent of those assets,” the lender said. Similar commercial accords impose fees of as much as 6 percent, said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California, research firm.

The bank would pay a $4 billion fee in the form of preferred stock and warrants, plus an annual fee of 20 basis points for undrawn amounts of the $118 billion, or $236 million, according to Treasury’s summary of terms, with more fees if the bank tapped the program. A basis point is one-hundredth of a percent. Bank of America could end the guarantee any time if the U.S. consented, with an “appropriate fee” to be negotiated, the document said.

Delayed Approval

The term sheet said it was “accepted and agreed by and among the following as of Jan. 15, 2009” and listed the bank, Treasury, Fed and Federal Deposit Insurance Corp. Each specific instrument in the pool of covered assets “must be identified on signing of the guarantee agreement,” the sheet said.

The process dragged on as the Treasury dealt with multiple financial crises and debated which assets would be included, according to the people. By May, Bank of America told investors it was “seeking to end negotiations” because credit markets had improved and the protection wasn’t needed anymore. Losses weren’t likely to reach the $10 billion trigger for federal participation, according to a May 7 statement.

Federal Reserve Chairman Ben S. Bernanke told Congress on June 25 the accord wasn’t “consummated.”

“When I was in government, we got everything signed,” said Paul Allan Schott, former chief counsel at the Comptroller of the Currency and ex-employee of the Fed and Treasury, according to his biography at WBC Financial Group LLC, a Washington consulting firm. “But I never had as many irons in the fire.”

‘Hellish’ Consequences

The bank should pay at least a third of the premium, or about $1.3 billion, because investors assumed the agreement was in force from January through May, or about a third of a year, said Tim Yeager, a business professor at the University of Arkansas and former Federal Reserve Bank of St. Louis economist.

Bank of America shouldn’t have to pay anything, said Gary Townsend, president of Hill-Townsend Capital LLC, a Chevy Chase, Maryland, hedge fund that invests in lenders.

“It’s the fault of the government for never getting it signed,” said Townsend, who said his firm has purchased shares of the bank. “But part of the inherent unfairness in dealing with government is that they can manipulate all kinds of things to make your life hellish.”

Lewis has testified that regulators pressured him to complete the Merrill purchase, and said May 8 he wanted to get the government out of the bank’s operations. The Treasury holds $45 billion of preferred shares in the company through the Troubled Asset Relief Program, more than any bank except Citigroup Inc. Bank of America’s dividend payments to the government may exceed $2 billion a year.

No Hindrance

“We don’t want to do anything that hinders their ability to exit from TARP, but in terms of fairness, there should be a recognition that the agreement benefited them,” said Kurt Bardella, spokesman for Representative Darrell Issa, a California Republican and ranking minority member of the House Oversight Committee.

Regulators face pressure from Congress to extract more money from companies that took part in the $700 billion TARP program. The Congressional Oversight Panel said July 10 the Treasury sold warrants obtained from rescued banks for about two-thirds of what they were worth. A Treasury official familiar with the matter said last week the agency rejected as too low most of the proposed prices from the largest banks.

“Treasury has to appear tough,” said Kevin Jacques, a former economist for the agency, referring to the Merrill Lynch guarantees. “Otherwise this will be politicized and people will say that the bank and Treasury were in this together and they just ripped off the American taxpayer,” said Jacques, now a finance professor at Baldwin Wallace College in Berea, Ohio. “There is a political cost here if they just let Bank of America walk.”

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net

Last Updated: July 13, 2009 10:08 EDT