While the government has attempted to shore up the financial system with massive bail out money in the past several months, it is entirely possible that in the quest to rescue the system they have aided many large banks in destroying the ideas on which the system was originally built. This has been most evident in the effects of Bank of America’s (BAC: 6.00, 0.00 (0.00%)) shot-gun wedding with Merrill Lynch. There has been speculation that government officials, including Henry Paulson and Ben Bernanke, offered incentives to Bank of America’s CEO, Ken Lewis, so that he would follow through with the deal despite previously unexpected losses from Merrill. The problem: shareholder’s were not made aware of the mounting losses.
Despite some reservations, Kennith Lewis was told by the government that he had no choice but to close the deal, and he was essentially offered $138 billion of tax payer funds to stay the course. The government provided $20 billion in capital on top of the $45 billion already received while agreeing to cover half of the losses on $118 billion in assets. From the beginning, officials have stressed to Mr. Lewis that the transaction was in the best interest of the nation and Bank of America. However, Mr. Lewis paid a premium for Merrill; the $24 billion deal closed on the first day of the year. After the bank revealed the losses they would incur from absorbing Merrill Lynch, shares are down over 80% since September. The deal may have been in someone’s best interest, but it certainly wasn’t in the best interest of Bank of America’s shareholders, who continue to see the value of their shares become diluted by government infusions. Even when Mr. Lewis knew Merrill’s financial position was worse than originally expected, he failed to tell the shareholders, who were asked to vote on the merger.
The Deal Makers
Mr. Lewis has historically been aggressive when it comes to acquisitions. When the Merrill deal was announced he commented, “We are good at this.” So far, that remains to be seen. He will be under the microscope of investors and BAC’s Board as he attempts to integrate the companies. The merger may be more difficult than expected for a host of reasons, including the difference in cultures at the two firms. Compensation has also historically been greater for Merrill Lynch bankers.
Mr. Lewis and the government officials are not the only ones to blame. John Thain, who recently resigned as head of the combined company’s global banking and wealth management operations, left for vacation after news of Merrill’s $15.31 billion quarterly losses surfaced.
