Bank of America Stock Plunging from Acquisitions and More Bailout Money

For some time it looked like Bank of America might fly over the banking crisis and actually prosper by vulture investing in Countrywide and Merrill Lynch. Now, it looks like it is choking on the bones it tried to swallow. It's stock is at its lowest point since 1992 and the future doesn't look so bright.

For some time it looked like Bank of America might fly over the banking crisis and actually prosper by vulture investing in Countrywide and Merrill Lynch.  Now, it looks like it is choking on the bones it tried to swallow.   Today, Bloomberg and other business media are reporting that the company will need to seek additional government bailout money to stay solvent.  That's in addition to the $25 billion the goverment has already invested in the company.  At the time, Ken Lewis and BofA manangement tried to make it appear like they didn't really want or need the money.  Clearly, that was for public perception only.  Since last year, when it purchased Countrywide, Bank of America has taken on two risky acquisitions that have now destroyed its share price and have forced it to ask for government intervention.

In January of 2008, a year ago but nearly a century ago in financial terms, Bank of America agreed to acquire Countrywide.  At the time, it looked like a smart deal.  Countrywide was the largest mortgage lender in the country and while its subprime mortgage portfolio was looking toxic,. there still appeared to be plenty of value in the franchise.  Bank of America scooped it up, believing the recession,, if there was one, would be mild and home values would start appreciating soon. 

But the recession hasn't been mild and one can only wonder what is happening to Countrywide's loan portfolio as foreclosures soared more than 80% in 2008.  Nor are foreclosures confined only to the subprime market.  Prime mortgage foreclosures have also beein increasing rapidly.  This was one bad miscalculation which even suprised me.  At the time, I thought the purchase was a smart move and that the BofA management team knew what they were doing.

Bank of America's second distressed purchase was Merrill Lynch.  This deal was a bit more perplexing.  As Merrill was totteting, Bank of America moved in and purchased the brokerage for $29 a share.  Many, including JRogers, another write on this site believed that Bank of America had grossly overpaid for Merrill Lynch.  At the time the deal was announced in September 2008, he wrote:

"t just doesn't make sense. 

On a night when they could have picked up Lehman Bros. for $1, but obviously chose not to because they couldn't get their hands around the liabilities and couldn't get the US government to provide Bear-like liability limitation, Bank of America chose to purchase Merrill for $44 billion of $29 a share.   Why?

The first thing that you do is hand it to John Thain, Merrill's CEO.  He obviously cleaned up Merrill's balance sheet to the point where it could be easily understood and the liabilities would be able to be tolerated.  But, then who knows?   Bank of America acquired Countrywide in spite of the fact that that it brought extraordinary liabilities which they did not understand.

Whether Bank of America understood the liabilities, they certainly could have picked up Merrill for a lot less than $29.  With the stock going out at $17 on Friday and Lehman's failure imminent, a $22 price would have looked very good to Merrill's shareholders this morning.  Moreover, if Ken Lewis could have waited until the market opened on Monday, Merrill would have lost half of its value and could have been bought for a song.  With Lehman gone, attention certainly would have turned to Merrill's viability.  The stock, which went out of Friday at $17, certainly would have lost half of its value would have opened at $8 and have been purchased for about $14."

This is a correct analysis.  Bank of America CEO has given a few weak arguments for why he purchased Merrrill at a such a premium, but the fact remains that he grossly overpaid.

Now, the company is looking for goverment support to help keep itself afloat.  Some of it may be warranted.  Several analysts on CNBC said that Bank of America was coerced into staying with the Merrill deal by regulators, who wanted to make sure another large institution didn't fail. Maybe

But David Faber on CNBC did an interesting analysis.  He looked at Merrill's Q3 2008 numbers before it was purchased and didn't see that many toxic assets.  In other words, it looked like Merrill had mostly written down most of its toxic waste before the deal closed.

If that's the case, what's the real problem at Bank of America?  Countrywide?  Or what about its massive credit card portfolio, purchased from MBNA? 

Bank of America is the largest US bank by assets.  But if those assets start to go bad, it will be the costliest US bank.  It appears that Bank of America has now become another taxpayer funded and dependent financial institution.  Sadly the shareholders are wiped out and the taxpayer is stuck with the bill.  It truly is Bank of America.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • JBHardy

    January 19, 2009

    I like your article, but if you listen to the transcript, they are still pinning the tale on writeowns at Merrill. The big question is how the writedowns at Merrill could have been so big when they looked so harmless in the fall, and how bad things at BoA will get when the consumer credit crisis starts to bite hard?

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