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Is Bank of America (BAC, news, msgs) too big to fail -- or is it just too big?
After scooping up Merrill Lynch (MER, news, msgs), Bank of America chief Kenneth Lewis will have his hands full running the banking behemoth that he's built through a string of high-profile acquisitions.
But is he buying trouble with Merrill and getting in over his head?
On the surface, the purchase looks like a dream deal. The proposed takeover would add Merrill's powerful U.S. retail brokerage sales force. And it would fill a big hole at Bank of America by bringing in Merrill's foreign money management and investment banking operations.
But the Merrill deal is fraught with potential land mines and headaches at a time when Bank of America needs them the least.
- The biggest problem: Merrill still has hefty exposure to toxic home mortgage derivatives, and it's not clear what the potential damage is there.
- A second problem: integrating Merrill's white-shoe culture with the down-home Southern style of a bank based in Charlotte, N.C. Merrill's high-priced talent could wind up the bull in Lewis' china shop.
- Bank of America already has had its hands full digesting a string of purchases over the past few years, including Countrywide Financial, the poster child for dicey home mortgages. Continuing ugliness in the California housing market, where Countrywide did its dirtiest deeds, threatens to pile up even more losses. Bringing more mortgage-related risk into the fold via Merrill Lynch would do little to raise confidence at a time when a lack of confidence in banks is bringing them to ruin.
- And B of A's stock is down 40% in the past year amid a tough economy and a banking crisis.
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None of this means that, if you have an account at Bank of America, you should take your money and run. Indeed, the deal raises the prospect of a one-stop financial supermarket where you could do all almost any imaginable financial transaction through a single ATM.
After buying Merrill Lynch, the largest bank in the country would boast $924 billion in deposits and $2.9 trillion in assets, according to research firm SNL Financial. That should secure its place in the too-big-to-fail category that's thought to guarantee federal support if the worst happens.
Of course, what "too big to fail" means is far from clear now, since the feds let Lehman Bros. (LEH, news, msgs) fall but rescued American International Group (AIG, news, msgs).
Also, keep in mind that most bank accounts are insured. If you're not sure about yours, check the details in "10 ways to protect your money now."
But if you're a shareholder, it's another matter. I'd take advantage of recent strength in the stock to sell before more ugliness emerges from the Countrywide and Merrill Lynch loan books. That could increase fears and force Bank of America to raise more capital, which would likely bring down the stock price.
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Was Merrill worth it?Bank of America's deal to buy Merrill Lynch is great for the financial markets, but it might not be so hot for B of A shareholders, MSN Money's Jim Jubak says.
Last bank standing?
There's no doubt Bank of America has followed a brilliant strategy. By sticking to a tradition of conservative banking and management at a time when competitors were diving headfirst into risky home-mortgage loans, Bank of America now finds itself as one of the last banks standing with enough capital strength to hunt for treasures amid the financial sector's wreckage."Someone was thinking in Charlotte," says Dennis Santiago, the chief of Institutional Risk Analytics, a financial-sector research firm based in Torrance, Calif. "Bank of America has always been one of the more truly conservative banks out there. They are now in a position to take advantage of all these assets that are coming on the market."
Continued: What Merrill Lynch brings to the table
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