BofA's Merrill Purchase: Good for America, Bad for Them

Feb. 5.09 | About: Bank of (BAC)

You have to hand it to Merrill Lynch. Their “merger” with Bank of America (NYSE:BAC) perfectly symbolizes everything the public ought to and does hate about Wall Street, especially Merrill’s cleverly-gotten gains at the expense of Bank of America and its shareholders.

And it's that last term - "at the expense of Bank of America" - that leads me to discussing the greed heads at Merrill Lynch. In September their former CEO, John Thain, craftily made the bum's rush on B of A's Ken Lewis the weekend Thain realized his firm could be worth a nickel by the following Friday. Ken took the bait (BTW... what was all the "rush" for?) and by the following Friday Merrill Lynch was well below the purchase price. It would have been down 90% if B of A hadn't rescued them.

Then Thain brought his cohort with him to B of A, blithely going his way, planning a ski vacation in the midst of a $15 billion meltdown in Merrill's books that miraculously "appeared" during the last 3 weeks of the December quarter, while arranging extravagant exit bonuses for his execs just before the door would close on him too (this move by Thain was almost biblical in its sagacity).

And so what do the vaunted execs at Merrill do after their butts have been spared the axe and their worthless stock options vested? They jump ship, leaving Ken Lewis and B of A shareholders holding the bag for saving their sorry tails.

Mr. Lewis should have told the Bush government in mid-December "thanks but no thanks" to the merger and let Merrill be devoured by the market forces it helped set in motion. He had every right to do so - the financial landscape had changed so completely in the subsequent two months after the deal that it was perfectly consistent with the "material adverse event" clause in the contract with Merrill. It would have been "justice" in the ultimate sense of the word too, because MER was now insolvent without a leg to stand on. The company could have been wiped out once the shorts got to them and their equity drained to zero. Bankruptcy was probably a sure bet. And B of A shares would have rallied rather than tanked - leaving Merrill's toxic barge to float on its own.

Instead the folks at Merrill walked away with $15 billion (plus their $5 billion in bonuses) and now their "best people" are quitting the new employer in droves. Loyalty anyone? Merrill might chime-in with Mr. Plunkett, the 19th century Tammany Hall politico who opined, "I seen my chances and I took em."

Why did Mr. Lewis put his shareholders in this position - down 66% in capitalization in just three short weeks, the company now a plaything for the short sellers? Because he was patriotic (in the true sense of the word). Because the government urged him not to abandon the deal because in doing so it might imperil the economic system. So the government backstopped the deal and Mr. Lewis is now falling on the sword laid out for him, with the dividend tossed in the dumpster along the way.

If there is any justice in the world (I know - maybe there isn't any Santa Claus, Virginia), the Obama government might remember what B of A did for them (Mr O's economic team inherited a Dow at 8,000, not 6,000). And maybe one day B of A shareholders will look back at $5.00/share with a sense of pride and good fortune - rather than disgust and dismay at how badly they were screwed by the worst Federal administration in a hundred years and some of the greediest creeps Wall Street has ever produced.

So far doing the "right thing" for the country was the worst thing B of A could have done for itself. Before Countrywide and Merrill came along, they had a pristine balance sheet. Let's hope that Leo Durocher's oft quoted phrase doesn't apply to B of A, "Nice guys finish last." At least not last and hopefully, not dead too.