Acquiring Merrill Lynch: the Lure of Liar’s Loans

Merrill Lynch is the quintessential example of why it was common for the investment banks to hold in portfolio large amounts of collateralized debt obligations (CDOs).  Some observers have jumped to the naïve assumption that this indicates that the senior managers thought the CDOs were safe investments.  The “recipe” for an investor maximizing reported income differs only slightly from the recipe for lenders.

  1. Grow rapidly by
  2. Holding poor quality assets that provide a premium nominal yield while
  3. Employing extreme leverage, and
  4. Providing only grossly inadequate allowances for future losses on the poor quality assets

 These are the words of Professor William Black who made legend status by putting about 1500 bankers behind bars during the savings and loan scandal which cost millions of Americans their pensions and savings. He is a strong supporter of the same action now. Here is what he has to say about BofA where most of John key’s wealth resides making his position as our Prime Minster fraught with conflict of interest.

Bob Ivry, Hugh Son and Christine Harper have written an article that needs to be read by everyone interested in the financial crisis.  The article (available here) is entitled: BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit. The thrust of their story is that Bank of America’s holding company, BAC, has directed the transfer of a large number of troubled financial derivatives from its Merrill Lynch subsidiary to the federally insured bank Bank of America (BofA).  The story reports that the Federal Reserve supported the transfer and the Federal Deposit Insurance Corporation (FDIC) opposed it.  Yves Smith of Naked Capitalism has written an appropriately blistering attack on this outrageous action, which puts the public at substantially increased risk of loss.

I write to add some context, point out additional areas of inappropriate actions, and add a regulatory perspective gained from dealing with analogous efforts by holding companies to foist dangerous affiliate transactions on insured depositories.  I’ll begin by adding some historical context to explain how B of A got into this maze of affiliate conflicts.

Ken Lewis’ “Scorched Earth” Campaign against B of A’s Shareholders

Acquiring Countrywide: the High Cost of CEO Adolescence

During this crisis, Ken Lewis went on a buying spree designed to allow him to brag that his was not simply bigger, but the biggest.  Bank of America’s holding company – BAC – became the acquirer of last resort.  Lewis began his war on BAC’s shareholders by ordering an artillery salvo on BAC’s own position.  What better way was there to destroy shareholder value than purchasing the most notorious lender in the world – Countrywide.  Countrywide was in the midst of a death spiral.  The FDIC would soon have been forced to pay an acquirer tens of billions of dollars to induce it to take on Countrywide’s nearly limitless contingent liabilities and toxic assets.  Even an FDIC-assisted acquisition would have been a grave mistake.  Acquiring thousands of Countrywide employees whose primary mission was to make fraudulent and toxic loans was an inelegant form of financial suicide.  It also revealed the negligible value Lewis placed on ethics and reputation.

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