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Merrill Lynch brings a lot to the table:
- Folding in its retail brokerage and wealth management teams would add more than 16,000 financial advisers to B of A, bringing the total to 20,000 advisers managing $2.5 trillion in client assets, points out Credit Suisse (CS, news, msgs) analyst Todd Hagerman.
- Merrill's Global Wealth Management and international investment banking would fill two key holes at Bank of America, Morgan Stanley (MS, news, msgs) analyst Betsy Graseck says.
- Bank of America thinks it can wring out $7 billion in savings by 2012, or about 10% of the combined expense base.
Risks run high
But buying Merrill also looks like a big roll of the dice.The combination would bring one measure of Bank of America's capital strength, its Tier 1 ratio, down to about 7.3%, or well below a peer average of 8.5%, says Goldman Sachs (GS, news, msgs) analyst Richard Ramsden.
And things could get even worse.
Merrill Lynch would bring to Bank of America $50 billion worth of "high-risk" positions in debt instruments related to home mortgages, estimates Citigroup (C, news, msgs) analyst Keith Horowitz.
"Merrill Lynch has a black hole of liabilities," says one hedge fund manager who is short Bank of America stock. "Obviously, Merrill thinks they have a lot more liabilities than they disclosed -- otherwise they wouldn't have done this sale," he says.
Losses from Countrywide could be twice as much as the $14 billion now estimated by Bank of America, suggests Christopher Whalen, a managing director at Institutional Risk Analytics. We won't get a clear picture of Countrywide's impact on Bank of America financials until it reports its third quarter. But it could be a lot uglier than Bank of America expects.
"The bulk of Countrywide is a write-off," Whalen says. Plus there are also dozens of lawsuits against Countrywide by homeowners and others, challenging their practices during the housing boom.
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A lot of the upside in a Merrill acquisition could vanish if merging the two companies proved tough and top talent bailed out.
"The cultures are different. They are not even in the ballpark," one former Merrill Lynch analyst says. "They will not get along. That is going to be a big problem."
Plus, Bank of America already has its hands full on this integration front, digesting recent purchases of LaSalle Bank, credit card company MBNA and asset manager U.S. Trust.
So though the new Bank of America may not ultimately be too big to manage, it wouldn't be easy while these obstacles remained.
Bank of America representatives declined to comment for this column.
Failure not in the cards
If Bank of America does run into serious problems because it has bitten off more than it can chew, potential failure is still far down the road. And again, even that wouldn't mean deposits were at risk. First, there's that membership in the too-big-to-fail club."I don't think the government would let that happen," says John Foff, an analyst at SNL Financial in Charlottesville, Va.
Second, a good chunk of those deposits are insured by the Federal Deposit Insurance Corp. That would make any big bank tougher for the feds to write off in even the worst-case scenario.
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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.
Behind the scenes, the Federal Reserve would make sure things don't move in that direction, by granting the kind of regulatory flexibility Bank of America needed to raise any necessary capital, Credit Suisse's Hagerman says.
And if it does turn out there is too much nasty stuff on Merrill's balance sheet, we'll never even see a Bank of America-Merrill Lynch combo. The buyout still has to be approved by B of A's directors. In the coming days, they will take a close look at better research on Merrill's holdings -- the kind of research that didn't get done last weekend in the haste to announce a tentative deal agreement that might calm the markets.
If there's too much nasty stuff or the board can't get a handle on what is really there, the deal is off.
In that case, Bank of America would still be too big to fail -- but it wouldn't be too big to manage.
At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.
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