Saturday, February 28, 2009

Wasting $50b to lose $170b

In September, NationsBank Bank of America spent $50 billion to buy Merrill Lynch. It’s now lost more than three times that as the Merrill purchase promises to be a boat anchor that will drown the once healthy bank.

BAC common shares have fallen 90% in 5 months, since a 6 month peak of $38.13 on October 1. Most of that fall came in mid-January, after the depth of the Merrill quagmire became publicly known. Today, BofA’s market cap is at slightly less than $20 billion, not counting the $25 billion of TARP money it’s received. So its $50b purchase hast cost it $170b in market cap.

Former bank examiner (and now BU finance lecturer) Mark T. Williams has compiled a list of seven breaches of fiduciary duty by the BofA management, starting with the decision to buy Merrill on 48 hours notice without time for meaningful due diligence. It’s a pretty sorry picture.

Normally, I’d agree with TJ Rodgers that shareholder suits are only designed to extort money to benefit bottom-feeding scum-sucking slimeballs like Bill Lerach. However, in this case I might be willing to make an exception — as someone who’s lost 70% of his investment after buying the shares on December 1.

The only reservations I have about joining the Ken Lewis lynch mob is that Williams’ account leaves out a couple of salient facts. Once BofA discovered its mistake, the Federal government pressured it to stick to the buyout and abetted (if not demanded) misleading shareholders — perhaps laying the fault for errors #4 and #5 at the feet of the Fed or the Treasury.

Williams argued that the BofA CEO should have ignored Federal pressure:

When asked by media why BoA accepted Financial Stability Plan money, Lewis indicated that senior Treasury officials implied that it was in the best interest of the country to close the deal. In making such a decision, it appears he and the board failed to recognize that their loyalty and care should have been to its shareholders, not to the Treasury.
but I suspect that the decision wasn’t that simple. We probably will never really know what’s went on (and is going on) behind closed doors in our semi-socialized banking system, including what kind of pressure the government brought to bear as it sought to stem the collapse of American financial markets.

However, I don’t see how anyone can disagree with Williams’ final analysis:
Regardless of the outcome of investigations into breaches of fiduciary duty, the real loss is that BoA only six months ago was a strong and valuable banking franchise. If it had not quickly jumped into the ML deal, they would have been well positioned to be a dominant player in today's banking sector.

Instead, Bank of America continues to fight for its survival and there is a real chance that it may even need to be nationalized. That would be a dire day for banking, for America and, unfortunately, for BoA shareholders.

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