Blog

"It's Over" - Merrill Lynch to be bought by BofA for $29 a share

Monday, September 15, 2008, 7:26 AM

Things are certainly progressing at a very fast pace.  I find it inconceivable that Bank of America (BAC) would step up and buy Merrill Lynch (ML) on such short notice.   ML is heavily exposed to the same stuff as Lehman, and we know that today (Monday) is going to see some heavy trading in the derivative markets as a result of the bankruptcy filing by Lehman.

Who would buy a company so fast and under such circumstances?  Well, BAC for one, although I am intrigued by what sort of pressure (or agreements) the regulators applied  to the situation.

Conventional wisdom says that bold acquisitions made when there is blood in the streets are one of the prime ways to grow your business and make a killing.  At this stage, I am not yet ready to believe this move by BAC represents such an event.

In my mind, it is equally likely that they jumped the gun and bought something worth far less than they paid.  We shall see.

Quote:

Merrill Lynch, the world's largest broker, agreed to be acquired by Bank of America for $29 a share, or $43.5 billion, after being pressured into a deal by federal regulators.

Morgan turned down a possible acquisition because it couldn't examine Merrill's books in 48 hours, a person close to the matter said.

"Merrill Lynch has significant exposures and Bank of America would need enough balance sheet to handle that."

Meckler also noted that the due diligence Bank of America would need to do on Merrill's books would be a serious undertaking, given the complexity of the company's exposure to mortgage-related securities and other complex debt.

Link to article

At any rate, count me as 'stunned' at how fast events transpired for ML.  The speed of this deal speaks volumes about what is going on behind the scenes right now.

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

14 Comments

ianp123's picture
ianp123
Status: Member (Offline)
Joined: Jun 11 2008
Posts: 9
48 Hours?
J.P. Morgan was expected to audit the books of a major financial firm in 48 hours to decide whether to step in? While I'm no expert, doesn't this sort of due diligence usually last for months??
cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5733
Yep, 48 hours.

 

Consider that in 2005 Fannie Mae got caught in an accounting scandal and had to spend more than a year and half, $800,000,000 and a team of 1,500 forensic accountants to determine their 2004 profit and loss.

 

And that was under stable market conditions.

 

How confident do you suppose BAC is that in less than 48 hours they have a solid view of what they just bought?  I can tell you with complete assurance that they have no idea whatsoever what they just bought from a liability standpoint.  Assets?  Yeah, they probably have a pretty good idea of that.

 

But liabilities?  No, nothing.  No idea.

 

Chris Martenson

ianp123's picture
ianp123
Status: Member (Offline)
Joined: Jun 11 2008
Posts: 9
Yeah... I bought a used car
Yeah... I bought a used car like that once...
Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
A few very important data
A few very important data points don't add up. The only reasons why BAC would pay up for MER would be if they thought that their stock was hugely overvalued compared to MER or if there were actual additional buyers they were competing against. One other possibility is that they were all stupid but somehow I think there are some very intelligent people that work there so for now I will discount that. Also doesn't it strike anyone odd that throughout this whole crisis that the US dollar has been incredibly strong rallying against most other currencies?
kcim67's picture
kcim67
Status: Member (Offline)
Joined: Aug 19 2008
Posts: 13
Russian Roulette Time
The bankers knew after Fannie and Freddie that the next one up was taking the hit, Lehmans is the sacrificial lamb, they're all running around saying "my hair is on fire my hair is on fire" hands flailing in the air! It's hilarious if it wasn't so damned serious. BAC must be just as screwed as Merryl and feel that by combining they make themselves to big to be allowed to fail, there can't be any other logical explanation!
DavidLachman's picture
DavidLachman
Status: Silver Member (Offline)
Joined: Jul 4 2008
Posts: 153
winners and losers
It seems that someone must think that the Fed and Treasury are going to pick winners and losers. If you play ball and help out you get a better chance to be a winner. This looks like playing ball, and as you've pointed out, there are public actions we read about and private actions the Fed and Treasury are doing that we won't find out about for years. I suspect there may be a private agreement that will assure BOA/MERRILL will still be standing when all this is over, no matter what it costs. The timing is too perfect, Lehman fails, but Merrill (its twin) gets saved within the private enterprise system "without" government providing money and assurances. I don't believe it. In the old Soviet Union everyone knew the media didn't tell what was really going on. It seems in our new centrally planned economy we should develop the same level of expectation of the media. Put lipstick on it and it still smells like a pig.
cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5733
Market comments

 

Looks like either hope dies hard or the PPT has a lot of money.  I find it rather odd, otherwise, that the market has done nothing but trend up from the very first minute of open trading after the cash and futures settled to their equilibrium price.

 

This is just not "normal" behavior", and I would fully expect the "market stabilizers" to be out in full force.  On the one hand, this makes sense, on the other hand it distorts true pricing preventing recognition of the full extent of the problems.

 

But these early props are of less interest to me than how the market closes.  That will tell the tale.

 

From 3:00 to 4:00 is when I'll be glued to the screen watching the volume and price data very closely.

Chris Martenson

wmarsden's picture
wmarsden
Status: Bronze Member (Offline)
Joined: Apr 6 2008
Posts: 38
Countrywide?
I figure there must have been some backroom deal to take away the liabilities of Countrywide. Countrywide has, in my personal experience as a tax accountant, the single most fraudulent portfolio of loans I've ever seen. I know there are supposed to be worse out there, but I've never seen them. Countrywide, however, I see all the time. They've give 30 year mortgages to 70 year olds on inflated values with no money down, essentially milking old people's retirement income. Fine and dandy as a business model until they suddenly find themselves with a portfolio of houses with negative equity. Due to the way they were over-inflating the values from the start and doing 80/20s and no-money down, they have a portfolio that is VASTLY overstated on their books. And Bank of America bought them. Bank of America just paid $44B for a company with street cap of $26B. They GOT something for this. My guess is it's a bailout.
Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
US dollar divergence from the facts
Chris, if you have time could you please comment on the action we've seen in the US dollar these past few days? I really find it odd that this financial crisis isn't being reflected in the US dollar which should be the true measure of confidence/risk. Could it be possible that we're missing something and there are fundamental reasons behind this US dollar strength or is it all a distraction and we should see this divergence turn around?
joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
Wow i have a feeling that
Wow i have a feeling that somehow we will be paying for this and more much more. where was chris cox when his buddies were packaging up all that rotten fish and sending it around the world. and and who was it saying it really wasn't rotten fish it was fresh as if you just caught it and smelled just fine....oh yes the rating companies. and who was it that was responsible for keeping an eye on the chickens ....oh yes it was the foxes we have elected and reelected.(anybody out there checking voting records) seems like i recall that there was a revolution some 10 score and 32 years ago for less egregious deeds. at least i have a gerden and can grow my own food ...and bury my junk silver, which may not turn out to be junk at all
cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5733
  Good question.  Let

 

Good question.  Let me whip up a post on that subject.

Chris Martenson

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5733
About those ratings agencies...

 

This is so absurd you really have to laugh:

 

[quote] LONDON (MarketWatch) -- Fitch Ratings slashed its credit ratings on Lehman Brothers  Monday after the U.S. firm said it would file for bankruptcy. The rating agency cut its long-term issuer default rating to D from A+ and its senior debt rating to CCC from A+ among other downgrades. Fitch said its ratings on the group's subsidiaries, which are not included in the bankruptcy, will likely be downgraded as more information becomes available.[/quote]

Say what?  Cutting from A+ to D in one fell swoop?  And only after the bankruptcy was announced?  Fitch gets paid for this 'service'?

 

This is beyond absurd.  Financial Dadaism at its finest.

 

Chris Martenson

Abelian's picture
Abelian
Status: Member (Offline)
Joined: Sep 15 2008
Posts: 2
29 a share
Hi Chris, Thanks for all of your work on this site. Shouldn't we be saying the Merrill is being bought "at" $29/share rather than "for" $29/share. From what I've read this is a stock swap, 80 shares of BOA for 100 shares of Merrill. Can you confirm this is an all stock deal and no cash is involved? BOA doesn't have cash to do this deal. Will Merrill pull BOA down even faster? It is interesting that the Fed has instituted a widespread exemption from section 23A of the Federal Reserve Act (12 U.S.C. § 371c) and the Board’s Regulation W (12 CFR part 223) for all banks to put deposits into their investment banking side. Does this signal the beginning of the end?
wmarsden's picture
wmarsden
Status: Bronze Member (Offline)
Joined: Apr 6 2008
Posts: 38
I felt really stupid on
I felt really stupid on Monday making this comment, suggesting there was some backroom deal to dump a private company's bad loans onto the taxpayer. What I have discovered over the past year is that, no matter how cynical and pessimistic I can be, it's always WORSE. :-( In retrospect, four days later, I think it's really likely that the MOAB plan was in the works last week-end when BoA made the Merrill Lynch deal.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments