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By Margaret Popper and David Mildenberg Sept. 22 (Bloomberg) — Bank of America Corp., the biggest U.S. bank, said it will pay the government $425 million to cancel an unused guarantee of Merrill Lynch & Co.’s assets and cut reliance on federal support after two bailouts. 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 federal guarantee helped seal Bank of America’s takeover of the New York-based brokerage after fourth-quarter losses spiraled past $15 billion. While the accord 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 company affairs. Paying the fee is part of a plan to reduce “reliance on government support and return to normal market funding,” the company said yesterday in a statement. The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. will get 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.” 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 scolded the bank yesterday for missing a deadline to turn over documents sought by his panel. Chief Marketing Officer Anne Finucane plans to meet with Towns to discuss 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 Merrill asset guarantees prompted regulators to press for compensation from the Charlotte, North Carolina-based bank. The government said Bank of America 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. ‘Encouraging Sign’ The agreement reflects “an encouraging sign of increased stability in the financial system,” Treasury spokesman Andrew Williams said. The bank said in July it expected a settlement of the dispute within 30 days. “This is another terrible deal for taxpayers negotiated by the U.S. Treasury,” said Linus Wilson , a University of Louisiana professor who has studied government bailout programs. The bank is paying less than 10 percent of a potential $4.3 billion cost, including warrants associated with $4 billion in preferred shares cited in the term sheet and never issued. “The insurance company does not refund most of your premium just because you did not wreck your car in the last six months,” 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. New Board Member The bank added its sixth new board member this year, tapping DuPont Co. Chairman Charles “Chad” Holliday Jr . Bank of America will have 15 members on its board, down from 18, with all positions now filled. 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, the 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 .