updated 9/1/2009 12:11:21 PM ET 2009-09-01T16:11:21

Bank of America Corp. is looking to pay back some of the billions in federal bailout aid it has received in an effort to get out from underneath the government’s thumb, according to a published report.

Meanwhile, the government wants the bank to pay about $500 million to terminate a tentative pact in which the U.S. agreed to share losses on certain Bank of America assets, The Wall Street Journal reported late Monday, citing people familiar with the matter.

Paying off those loans could help ease some of the government scrutiny over Bank of America’s operations, including pay restrictions required of companies that have received federal aid. But some analysts question if the Charlotte, N.C.-based bank actually has the means to pay back the money, and whether the government will actually let the bank do so.

“It’s not clear, in my view, that Treasury will grant the company permission to move forward,” said Jason O’Donnell, a senior research analyst at Boenning & Scattergood Inc. “One could argue that redeeming $20 billion plus of the $45 billion in total is aggressive considering the fierce credit-related headwinds facing Bank of America in the second half of this year.”

A Bank of America spokesman declined to comment Tuesday on the newspaper’s report. A Treasury Department spokeswoman also declined to comment.

Shares of Bank of America fell 61 cents to $16.98 in an overall sharp drop on Wall Street.

Several banks, including JPMorgan Chase & Co., Goldman Sachs and Morgan Stanley, have already repaid money they received under the Troubled Asset Relief Program, or TARP. Doing so removed those firms from having their executive compensation packages approved by Kenneth Feinberg, the Obama administration’s pay czar. Bankers worried that the pay rules put them at a competitive disadvantage in retaining talented employees.

Bank of America is awaiting Feinberg’s approval of its 2009 executive pay packages.

“A move like this, repaying a portion of TARP, is really going not necessarily going to do anything in terms of lifting the restrictions, but what’s it’s going to signal to the Street that Bank of America has the ability to repay,” O’Donnell said.

Bank of America isn’t looking to pay back all of the $45 billion it received in TARP aid at once, according to the paper, but may give back the $20 billion it received in January to help it absorb teetering investment bank Merrill Lynch & Co.

Where the money will come from, or if the bank will have to raise additional capital, is unknown.

In July, Bank of America announced a big second-quarter profit, but tempered the news by reporting it is still contending with losses from failed loans. During a call with analysts, CEO Ken Lewis said it would be “much tougher” to turn a profit for the rest of the year.

If credit losses end up being worse than they expected, “in any scenario of paying back money, Bank of America may look back and regret returning funds sooner than they should have,” O’Donnell said.

The government helped orchestrate the bank’s acquisition of Merrill over the same weekend in September that another investment bank, Lehman Brothers, went under, setting off the most intense period of the financial crisis. As Lewis showed trepidation about completing the deal, the government in January doled out the additional funds and promised to cover losses on more than $100 billion in risky assets.

In return, the bank gave the Treasury Department billions in preferred stock which paid annual dividends worth hundreds of millions. The government maintains that if Bank of America wants out of that loss-sharing deal, it is on the hook for a break-up fee of between $300 million and $500 million, according to the Journal.

Treasury and the Federal Reserve want the bank to pay — perhaps millions of dollars — to end the arrangement, according to a government official with knowledge of the matter. The official spoke on condition of anonymity because terms were under discussion.

A person close to the situation says the bank, which once balked at paying an exit fee, is now seeking “middle ground,” the paper said.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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