Sept. 22 (Bloomberg) -- Bank of America Corp., seeking to reduce its need for federal support after two bailouts, will pay $425 million to cancel an unused government guarantee of Merrill Lynch & Co.’s assets.

The payment would end a dispute over what the bank owes the U.S. for a promise to help absorb losses on $118 billion of holdings, mostly at Merrill Lynch. The guarantee helped seal Bank of America’s takeover of New York-based Merrill after the brokerage’s fourth-quarter loss spiraled past $15 billion. While the guarantee was announced in January, an agreement was never signed and the bank resisted paying.

Chief Executive Officer Kenneth D. Lewis has said he wants to shrink the U.S. role in his company’s affairs. Paying the fee is part of a plan to reduce “reliance on government support and return to normal market funding,” the lender said yesterday in a statement. The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. will divide the money.

“The bank is a wounded duck and everybody wants a piece of them,” said Robert Serino, a partner at Buckley Sandler LLP in Washington and a former director of the Comptroller of the Currency’s enforcement and compliance division. “In the past, Ken Lewis was a pretty strong character, but now he’s been beaten down like everybody else.”

Bank of America also said the company, based in Charlotte, North Carolina, will halt participation in the Temporary Liquidity Guarantee Program. The Federal Deposit Insurance Corp. sponsored the program to provide backing for bank debt.

Shares Gain

“This is a major step forward,” analyst Richard Bove of Rochdale Securities LLC said in a report dated yesterday. “The company is regaining its financial credibility.” He raised his price target for the stock to $25 from $19, and the shares advanced 31 cents, or 1.8 percent, to $17.56 in 10:35 a.m. New York Stock Exchange composite trading.

Even as the payment was announced, the Securities and Exchange Commission pledged to “vigorously pursue” a case against the bank for not disclosing $3.6 billion in bonuses to Merrill before the acquisition was completed. U.S. Judge Jed Rakoff last week rejected a $33 million settlement, accusing both the bank and SEC of trying to avoid a public trial.

Congressional Pressure

Bank of America also faces pressure from Representative Edolphus Towns, a New York Democrat and chairman of the House Oversight Committee, who said he was “deeply troubled” after the bank missed a deadline yesterday to turn over documents about the Merrill deal sought by his panel. Chief Marketing Officer Anne Finucane plans to meet with Towns today on how to provide information “without violating attorney-client privilege,” bank spokesman Scott Silvestri said.

Lewis “is holding up very well,” spokesman Robert Stickler said. “He doesn’t dwell on things that he can’t control and he remains convinced that the deal will be a good one for shareholders over time.”

The government had pressed Bank of America to pay compensation for the guarantees because the lender benefited from the accord’s implied U.S. backing for three to four months as investors were speculating the company might fail or be nationalized.

While Treasury spokesman Andrew Williams said the agreement reflects “an encouraging sign of increased stability in the financial system,” Linus Wilson, a University of Louisiana professor who studies government bailout programs, called the bank’s payment “another terrible deal for taxpayers negotiated by the U.S. Treasury.”

TARP Status

The bank is paying less than 10 percent of a potential $4.3 billion bill, including warrants associated with $4 billion in preferred shares cited in the original term sheet and never issued, Wilson said.

Bank of America hasn’t received permission to repay the extra $20 billion of U.S. rescue funds that came with the Merrill deal, Chief Financial Officer Joe Price said last week. The bank received a total of $45 billion from the Troubled Asset Relief Program and expects to repay the money in installments, pending approval by regulators, Price said.

The bank added its sixth new board member this year, tapping DuPont Co. Chairman Charles “Chad” Holliday Jr. Bank of America plans to have 15 members on its board, down from 18, with all positions now filled.

Director From DuPont

Holliday “will get the board to gel in the proper way,” said Ram Charan, an author, management consultant and former Harvard Business School professor who said he has known the DuPont executive for 25 years. “The board will do what is necessary to get the most out of a franchise that is the envy of the rest of the banking industry.”

During Holliday’s 11 years as DuPont CEO, shares of the third-biggest U.S. chemical maker declined 55 percent. Bank of America shares have dropped by more than a third since Lewis took over as CEO in April 2001. Holliday didn’t respond to a request for a comment through DuPont spokeswoman Lori Captain.

To contact the reporters on this story: Margaret Popper in New York at mpopper1@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net.

Last Updated: September 22, 2009 10:38 EDT