ank of America’s buyout of Merrill Lynch seemed laughable to me – that is until I realized the full picture. With a $50 billion all-stock deal valued at $29 per share, at first glance it might appear that Bank of America doesn’t stand to lose much considering its stock is at least 50% overvalued by my analysis. However, even at an adjusted price of $25 billion, Bank of America will be responsible for absorbing all of Merrill’s losses. Good luck. But wait. They don’t need luck, they have the Fed.
I could care less about Merrill’s 49% stake in Blackrock. No financial institution is infallible under these conditions and only an idiot would rush in to buy Merrill at $50 billion. They are on the hook for a huge amount of mortgage securities. And their brokerage unit has been fighting a massive decline for years. In fact, I expected them to eventually sell it off.
While I can guarantee you all bank CEOs are lost in the woods, Bank of America’s CEO, Kenneth Lewis can’t be that stupid. Think about it. Lewis already committed to a buyout of troubled Countrywide well before he realized how bad things would get. How much blind risk can Bank of America handle? A lot if they are given a blank check by the Fed. And the fact is that they have been, along with the rest of the banking cartel. I’m quite confident Lewis was approached by the Fed and U.S. Treasury with promises of extra assistance, if needed, in exchange for buying Merrill. That is precisely why the bank offered a 70% premium for the struggling firm. Think about it. Merrill was on its way to single digits so why not wait? Better yet, why offer a 70% premium to its Friday closing price? This is the worst banking crisis in U.S. history and they’re offering 70% premiums?