For years a well-placed member of the corporate elite of Nicaragua, Bolaños became an outspoken critic of the Marxist, anti-private enterprise policies instituted by the Sandinista governments of the 1980s. He was also an outspoken critic of the Sandinista's poor human rights record and was a well-known defender of civil liberties, stances which led to two imprisonments by the regime during the 1980s. He also lost much of his private wealth and property to the land and wealth reforms instituted during this period.
In October 1995, Bolaños was named political manager of the center-right Liberal Alliance Party, headed by then-president Violetta Chamorro's vice president, and son-in-law, Antonio Lacayo. As the elections of 1996 approached, however, Lacayo was replaced by the politically ambitious mayor of Managua, Arnoldo Alemán as head of the Liberal Alliance Party. When Alemán won the presidency in 1996, over Sandinista leader Daniel Ortega, Bolaños was chosen to serve as vice president in the new administration.
The Alemán administration faced a difficult political situation since the National Assembly was led by a coalition of Sandinistas and the Christian Democrats, along with small, left-leaning parties, and so was stifled in many of its objectives. Alemán was also continually accused of corruption (his personal wealth had increased 900% during the seven years he served as mayor of Managua). In 2000, it was revealed that Alemán had entered into a secret pact with his political opponents in the National Assembly to stack the Supreme Court with cronies and to create laws granting Alemán and Ortega immunity from prosecution. Bolaños, who had been charged with heading an anti-corruption task force as part of his duties as vice president, resigned from his post and announced his intention to stand for the presidency in 2001.
The 2001 presidential race was tightly fought. From a large field of contenders, three men emerged as the front-runners by the spring of 2001: Ortega, the long-serving head of the Sandinistas, Bolaños, head of the newly-created Constitutional Liberal Party (PLC), and Noel Viduarre, of the Conservative Party. Fearing Bolaños and Viduarre might split the anti-Sandinista vote and thus provide Ortega with a victory, the United States pressured Vidaurre to resign from the race, leaving just Bolaños and Ortega. The election was held on 4 November 2001. Voter turnout was high, with estimates ranging from 75 to 90 percent of the electorate participating. Bolaños won with 56 percent of the vote to Ortega's 42 percent. He was sworn into office on 10 January 2002.