No Moss

Bank of America: Bank on This Opportunity

I sold my modest position in BAC today. I liked BAC up until the Merrill Lynch acquisition, and until they annouced that they might be (read that will be) cutting their dividend. Merrill Lynch does indeed involve risk, and risk of the worst kind. It's a company where the biggest assets go home at 5:00 (or at least sometime) at night.

Will those hotshots last a year with Ken Lewis, whose determined to bring expenses down? Probably not. He'll be left with a name, and probably not to much to show for his expense other than a pretty good stream of income from the remaining clients and the asset management business.

I loved the Countrywide deal, incidentally. The losses will work out, the mortgages originations will increase, and that mortgage servicing business in an underestimated jewel.

Merrill--a hugely bad fit. Ken Lewis has already proved he doesn't like or know how to run a brokerage business or an investment bank.

Buyouts and Shakeups: How the Financial World Is Changing

The role of the GSEs made them incredibly vulnerable. Although they have been saved, it's unlikely that they will resume their role as freely as before, meaning that commercial banks will take up more of the "burden" of mortgage lending. Without mortgage guarantees, money will be tighter and loans will have higher standards and bigger down payments. Securitization will be reduced. The clear beneficiaries of this will be commercial banks, who have large deposit bases to use as a source of loans (in the absence of securitization).

Homes will be harder to finance, but worthy borrowers will still be able to get a home loan. Savings rates will go up as people save for down payments, home prices will stabilize to modest appreciation, dampening the rampant speculation that made them so unafforadable in the first place. HELOCs will be reduced as equity climbs more slowly. Things will return, for a time at least, so a slower, more stable pace.

Securities will replace homes as the investment vehicle of choice, and the stock market will go up.

It's not a new world, we're just going to rearrange things a bit.

What B of A Gets by Passing on Lehman & Gobbling Up Merrill

Bryanz, it's the .86 (actually .8595) shares of BAC as the date of the actual sale, which I gather will be sometime in the first quarter of next year.

The events of last weekend revealed that we're running out of options for shotgun marriages. Federal officials believed that both Lehman and Merrill were going bad, and the only suitor they could find for an unassisted buyout was Ken Lewis for Merrill. Actually, the Fed probably offerred something to BAC, perhaps down the road.

Who do you think will be interested in Goldman Sachs and Morgan Stanley? And who can afford them?

BofA's Lewis Is Still Making Deals, But Now Aiming for Distressed Assets

Well, I grudgingly like the deal for Merrill. Ken Lewis wants three things from Merrill, i.e., increased deposits (MER's deposit-gathering arms are classified as a thrift and an ILC), relationships with wealthy individuals (MER has that in spades), and a chance to use BAC's access to cheap cash to get the easy money that will be available when investment banks start handling M&As and similar transactions again.

Traditional banking doesn't allow BAC much room for growth, since BAC will be well over the 10% deposit threshold with the MER purchase. BAC will get deposit growth by offering loans and services that are tied to a BAC bank account.

On the other side of credit excesses and unemployment growth is a future of better credit quality, a normal yield curve, and a pent-up demand for homes, cars, and stuff in general.

What's the BofA / Merrill Synergy?

Well, I'm not quite ready to give up on all this so quickly. The thing that Ken Lewis is looking at is keeping Merrill intact and reasonably happy. Lehman employees are wiped out, in terms of both morale and finances. Merrill employees are breathing a sigh of relief and gratitude. This will help immensely in merging the two cultures, which are quite different.

The synergies are there, in terms of giving BAC an affluent customer base, increasing deposits, and crossmarketing. And Merrill has enormous talent on its payroll, and a huge, valuable brokerage business.

It's Not a Crisis, But a Chaotic Calamity

Gee, I feel like it's the end of the world, Mr. Inger. Must be a market bottom. Yeah, it's a big problem. We have a big economy. Therefore, we have big problems, along with big successes. Our economy is shifting as we react to a changing global landscape.

Get used to it. We'll wring out the excesses and then real estate in California will go back to being impossibly overpriced, or maybe, hopefully, just a little bit less than impossibly.

It's not the end of the world, or even of the Republic. Greed took over for a while. As usually, the perps got a few handslaps, a few heads rolled, a few big guys lost a bundle. Mostly, the public lost, either directly or by bailouts.

But life will go on. The ship is still sailing, maybe a little bit slower right now. But we're scraping off a lot of barnacles, and we'll go faster in a little while.

Unregulated mortgage brokers? Bad idea. Hedge funds with leverage and black box "quant" machines? Why did we think those would work longer than someone's big paycheck? CDOs in banks' hands but not on the books? Real bad idea. 30-1 leverage at investments banks? Even worse. It was greed, OK? Billion dollar paychecks for hedge fund managers, bonuses and kudos on Wall Street and in bank board rooms for taking too much risk. We are scraping those barnacles off. They'll be back, but for the time being they're being scraped off.

We'll do a lot better when we have actually have to work for a living. And Mr. Cayne can go back to playing bridge.