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Monday, December 19, 2011

Bank of Merrillwide

I sometimes forget that not only did Bank of America (BAC) buy Merrill Lynch, which was inexplicably on the verge of an utter meltdown in the fall of 2008, but that it also took own the absolutely toxic Countrywide Financial.  In recent months, it seems to have inherited the same sick death spiral that both of those constituent companies had in the months leading up to their demises.

The mystique of former Bank of America CEO Ken Lewis always baffled me.  Bank of America was rarely a stellar performer, even among the ordinarily demure commercial banking sector (at least it appeared demure prior to 2007).  He made some significant acquisitions of companies such as FleetBoston and MBNA, but to say that those purchases alone made him some financial services management genius would be a little bit of a stretch.  Like many of the CEOs in the commercial banking sector, I think that he envied the apparent success of the investment banks, especially Goldman Sachs (GS), during the mid-2000s.  Indeed, traditional banking business units were often looked at with a measure of disdain during those years since they had declining margins and simply weren't as attractive as hedge funds, private equity, and any number of other newer businesses.

Some banks, like Wachovia, Citigroup (C), and Bank of America bet recklessly on the housing bubble in order to attempt to get attractive rates of growth.  They paid the price for it.  Wachovia nearly died and had to be bought by Wells Fargo (WFC) while Citigroup and Bank of America had close calls.  In the midst of all of it, Ken Lewis thought he would be something between the shrewdest value investor in history and the savior of the financial system by buying up Countrywide Financial and Merrill Lynch when both were on the brink.  Had both not been so terribly flawed, he might have been onto something.  As it was, he created a great big lumbering, wounded giant.

Lewis was booted (well, not really, but you know how this all works), but the legacy of his misdeeds still haunts Bank of America to this day.  Over the past year, the stock has atrophied horribly and now has plunged to devastating lows of less than $5 a share:

While no particular news has come out other than the constant drumbeat of bad news out of Europe, the implicit news that the market seems to have priced into the share price is that Bank of America will have to issue more shares to increase its capital ratios.  After all, it supposedly trades at just 5.5x next year's earnings according to current analyst estimates.  Since the overall market is not utterly panicked at the moment, it stands to reason that there might be something to this expectation.

With headlines like this one swirling around, it might be dangerous to speculate on the unknown here: http://www.marketwatch.com/story/draft-big-bank-capital-rules-expected-soon-2011-12-19

I should caution that while Bank of America has one of the lowest prices you'll see in a major financial stock, it's hardly unique this year.  Look at Goldman Sachs:

The two declines are not qualitatively different.

1 comment:

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