Bank of America Potentially the Next Citibank?

Fortune reports that NationsBank † Bank of America (BAC) shareholders (like me) are understandably angry about the (apparently) lousy due diligence done in the September acquisition of Merrill Lynch (MER).

The M&A consultants got $20m for a weekend’s worth of work, but the more serious problem is the contribution of the Merrill boat anchor to the $95b drop in BofA market cap since then (or the $70b lost since the election).

Unfortunately, the accountability here is pretty much nil. The BofA board can say this is a one-time deal, based on incomplete information during turbulent times — which is all true. The purchase was a big risk, and it turned out badly.

Less convincing is when they were sold a bill of goods on Merrill: making the tough decisions is supposedly why they get so much money. They made the decision to buy — not the consultant or the shareholders. Even if there were recourse against the consultant, it would be for some fraction of the fees, not the incidental and consequential damages.

Absent Merrill, BofA would probably be the largest healthy bank in America, the unchallenged position it enjoyed in the 1960s and 1970s. Now many suspect that it’s the next Citibank (C). (click on chart to enlarge)

† Bank of America was a San Francisco-based bank founded in 1904 (as the Bank of Italy) by A.P. Giannini. Once the world’s largest commercial bank, it disappeared when its brand and assets were acquired by Charlotte-based NationsBank in 1998.

Disclosure: Author holds positions in BAC

Comments

[mwfall:]

why didn't you write this article right after the transaction? if the recession is shallower and the stock doesn't drop then everything is fine. but when the stock drops, it's whine time.

Jan 16 02:38 AM

[pablosplace13:]

The BofA bailout makes me livid. BofA is paying Merrill's top brokers 2-3 times what they were being paid before to keep them from leaving and now we taxpayers are subsidizing it.

Jan 16 08:13 AM

[borisbear:]

Call me stupid, call me a moron, but I just bought 500 shares of BofA.
One of two Americans have some sort of an account with BofA, and they are being bailed out playing with the government's money to the tune of Billions (thank you very much Uncle Sam).
My daughter will either call me a genius in 10 years or the dumbest investor dad who ever lived. I would prefer to follow the footsteps of Sir John Templeton when he bought at the height of maximum pessimism.
There is a fine line between genius and lunatic...

Jan 16 11:40 AM

[secmaven:]

I am also a buyer after such waterfall declines. The fourth quarter loss in the Merrill division was ten times the reported loss for the quarter. This tells me that ex Merrill B of A is doing very well. And why not. I borrowed $1,000 on a B of A VISA card at zero interest until October with $30 paid up front. Then the interest rate goes to 24.99%. But if I fail to pay minimum payments at any time the interest rate advances to that level immediately. Further if I buy merchandise, the minimum payment I make is applied to the cash advance and the merchandise charges carry a 24.99% interest rate. Talk about minting money from issuing a credit card!

Jan 16 02:09 PM

[Robert DiAl...:]

I guess if you are short BAC you would be pretty negative and wish it lower. I wonder just how low it can go before the bounce and rally. Holding it short could cloud your judgment?????

Jan 17 05:35 PM

[mwfall:]

why didn't you write this article right after the transaction? if the recession is shallower and the stock doesn't drop then everything is fine. but when the stock drops, it's whine time.

Jan 22 11:08 PM

[mwfall:]

why didn't you write this article right after the transaction? if the recession is shallower and the stock doesn't drop then everything is fine. but when the stock drops, it's whine time.

Mar 06 03:46 PM