Bank of America's Acquisitions: What Was Ken Lewis Thinking?

Bank of America (BAC) is in big trouble. Notwithstanding its own credit issues, a slowing business cycle, and horrible macro conditions, it actually paid $100 billion for acquisitions in the last 5 quarters. This company wasn't even, in my opinion, worth $100 billion in the last 5 quarters. Talk about subprime borrowing!

• Bank of America Profit Skids 68%; Dividend Halved
• BofA in $8.6 Billion Settlement over Countrywide

Two of those acquisitions were the largest companies in their respective industries, along with the largest problems caused by the Asset Securitization crisis (or one could say caused by them).  Merrill Lynch (MER) led Wall Street in asset value writedowns, and I don't think it was really all that aggressive in doing so. Countrywide is a gaping radioactive cesspool of liabilities and underwater assets. It actually has practically as much in REOs (dollar value) as performing mortgages. This makes it effectively a real estate company - against its will. The legal liabilities appear to be near limitless.

What was Ken Lewis thinking when he bought these two companies? Integrating a large acquisition is hard enough, doing 5, with 2 being the largest in their respective (very large) industries during the worst credit and real estate downturn since the Great Depression, as your own credit and earnings metrics deteriorate in the face of nearly $10 billion + worth of legal liabilities seems to be  a form of corporate hari kari. Then again, what does a lowly blogger know about the intricacies of high finance and corporate machinations...

Comments

[Publicliter...:]

Reggie, I sure hope a "lowly blogger" doesn't know the intricate inner workings of BAC, but I fear you may be right. I think BAC is completely depended on the Fed mortgage bailout and at the mercy of whatever price they offer. However, if they negotiate a decent price it will make many of your points moot as that are no longer a real estate company...that would now be the responsibility of the Fed and and private equity guys that get in on the deal. Best of luck, I love your posts!

2008 Oct 07 10:51 AM

[Donp:]

It makes one wonder if they don’t have to block the Home Shopping Network on his TV.

2008 Oct 07 10:55 AM

[Tondog:]

"Then again, what does a lowly blogger know about the intricacies of high finance and corporate machinations..."

It seems as though Americas CEO's have a tendacy to be "optimistic" in their projections...it may be that from your outside prospective you can see reality better than they can...if you think about it; how pessimistic can a Fortune 500 execituive be when they are bringing home compensation in excess of a few million...I hope "BOA" is not falling into the same trap Citi did with the "be all things to all people" but as you said how can the possibly integrate all this crap?

Tony

2008 Oct 07 11:35 AM

[loudjew:]

Reggie, In your column picture, one could argue that you look like you're on holiday, or, then again, perhaps you're reaching for change at the bus stop......who the hell know's what BAC has up it's sleeves? Buying out ML, it obtains the good gravy accounts with gov't granted immunity of pre acquisition investor lawsuits. I've held shares of BAC for the generous dividend, but now a 50% cut?...I am looking elsewhere.

2008 Oct 07 11:36 AM

[maestro333:]

Reggie - you may be right about the strategic implications of the BAC acquisitions, but having worked there for 2 years, I can tell you that they know how to do merger integrations. I was at NationsBank for four large ones - Montgomery Securities, Boatmens, Bank of America and Barnett bank. All were done with speed and efficiency.

2008 Oct 07 11:44 AM

[Investor1:]

Wow... it makes me laugh when journalists give opinions on the world of high finance. For as well as your passage is written, it clearly shows that you have zero understanding on the topic. Some of the world's most brilliant minds are working on/with Wall St firms, and it seems every hack writer out there takes a dig at them with every chance they get. The sky is not falling.

2008 Oct 07 12:20 PM

[User 275554:]

What was Ken thinking? He was following the same line of thinking as the heads of AIG, Lehman, Wachovia etc. Ego, compensation and corporate legacy have blinded all these guys to the downside risk of their actions and now the chickens are coming home to roost in the current crisis.

I fear the value of Bank of America stock is going to ZERO! Just wait and see. They will either fail, merge for a couple of dollars a share or become a government owned and majority controlled financial institution with the work ethic and competency of the US Post Office. A sad state of affairs for such a great bank.

I am a stockholder and spent 25 years in the investment business and retired as president of a small US brokerage firm.

2008 Oct 07 12:41 PM

[MarvinMBA:]

Actually I believe in the long run things will work our for B of A. If you think B or A made the acquisition decisions you are wrong wrong wrong. The B of A is rational but its the Fed behind the door dictating the merger policy to save the banking/financial/mort... system in the country. I'm positive that the Fed has guarantees in place for B of A or these deals would have never been done. The Fed/USA will never let B of A go down the tubes because that would the end of the USA as we know it......believe it or not....MarvinMBA

2008 Oct 07 01:03 PM

[JEC:]

To Investor1...wake up.

To preface, since you bash the journalist, let me say...I am in high finance. BofA doesn't understand the underlying depth of the positions they have taken in thier acquistions. They did due diligence on Countrywide in 15 days...I say BS. Lehman has more than 2 billion different deriviative positions, imagine how many Mother Merrill had...and to think that BofA was able to do due diligence on those Merrill positions in two weeks. Wake up man, the market in general will recover 2+ years but BofA has some serious bumps in the road coming, if not worse.

They are employing the old late 80's Texas strategy of buying distressed assets on the cheap and leveraging up for growth. It served Ken Lewis and his cohorts well back then but unlike back then they are not cherry picking all this stuff at the bottom of the market...

2008 Oct 07 03:05 PM

[Reggie Midd...:]

Thank you JEC. Seeking Alpha seems to have the occasional pundit who indiscriminately bashes without knowing who it is they are bashing.

To Investor1:
This so-called "Journalist" has been most accurate in his writings throughout this whole crisis. Why don't you go through the older posts I made on Seeking Alpha and take a look-see.

Better yet, come to my site where the real meat is. I can guarantee you that just my written opinion should be enough to gain an objective man's respect. The free research that I published on my blog has outperformed ALL of the hedge fund category indices published by Barclay's (encompassing over 2600 funds), the S&P 500, and the MSCI world index, by at least 300% - both in the past year and year to date. The research model would have done so with much less risk as well. See boombustblog.com/index... Take note that these are just research models and not my proprietary results, which are private, but I am happy :-)

I took the liberty of comparing the results to many of the name brand "non-journalists" who I am sure you would not have hurled such an insult at. Don't fret, I forgive you. I normally never comment on SA due to the amount of negativity abound, but I am in a good mood and JEC took my back. Thanks bud!

So, don't bash all journalists because they right with flair and wit. One or two of them just might have an inkling of what they are talking about.

2008 Oct 07 07:16 PM

[dd:]

Keep on righting Reggie, I'm not even going to argue the term!

2008 Oct 08 05:15 AM

[Pretzel Logic:]

What was Ken Lewis thinking? My personal opinion is that these acquisitions are being done as a defensive measure. Making your bank bigger increases your chances of becoming "too big to fail." The acquistions (obviously) aren't to improve the balance sheet; they are desperate acts of self-preservation.

Love your blog, btw. Great work.

2008 Oct 08 06:39 AM

[Reggie Midd...:]

Thanks, all who are positive, at least. I understand the try to get too big to fail thesis, but I think what many are missing is that the government - particularly with democratic control on the horizon, but even now - will wipe out the equity holders before they rescue. If they rescue. Ask FNM, freddie man, BSC, LEH, AIG common and preferred share holders.

Again, I query: What was Ken Lewis thinking. The over the weekend due diligence of Merrill is a farce. I have seen the docs, takes a weekend just to wrap your head around 1 CDS agreement's legalities, then to assess the credit, market and economic risks... Which nobody really knows anyway - so he might as well just pulled the trigger over the weekend...

2008 Oct 08 10:33 AM

[kiers:]

what was K Lewis thinking:

side deals had been made with the understanding that the guv would "help" BAC out later. And yet I can't get proper health care from the same guv.

The words "Anglo-Saxon" and "Care" are oxymorons. Socialism for the elites! Competition for the proles.

Feb 28 11:23 AM

[kiers:]

what was K Lewis thinking:

side deals had been made with the understanding that the guv would "help" BAC out later. And yet I can't get proper health care from the same guv.

The words "Anglo-Saxon" and "Care" are oxymorons. Socialism for the elites! Competition for the proles.

Feb 28 11:23 AM