Now we know why John Thain was so eager to sell Merrill.
That comment isn’t entirely fair (the deterioration in the securities firm took place in the fourth quarter, while the sale was negotiated in September). But directionally, the former Merrill chief saw the downside risks and did what was best for the firm.
The problem, of course, is that Merrill is a systemically important player (readers may not like hearing that, but the Bank of England listed 16 “large complex financial institutions” in April 2007 that it deemed essential to global financial intermediation. Merrill was on that list). So letting the deal with BofA “fail” is a non-starter. BofA is not in a posiiton to take a big balance sheet hit to take over Merrill, now that the 4Q results are in.
From the Wall Street Journal:
The U.S. government is close to committing billions in additional aid to Bank of America Corp. as the nation’s largest bank by assets tries to digest its Jan. 1 acquisition of Merrill Lynch & Co., according to people familiar with the situation.
The discussion began in mid-December when Bank of America, already the recipient of $25 billion in federal rescue funds, told the U.S. Treasury Department it was unlikely to complete its purchase of the ailing Wall Street securities firm because of Merrill’s larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.
Treasury, concerned the deal’s failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte, N.C. lender on the “formulation of a plan” that includes new government capital. The terms are still being finalized, this person said, and details are expected to be announced with Bank of America’s fourth-quarter earnings, due out Jan. 20.
Any possible arrangement might protect Bank of America from losses on Merrill’s bad assets. There would be a cap on the amount of losses the bank would have to absorb with the federal government being on the hook for the remainder, according to one person familiar with the matter.
The possible deal is further evidence of the banking system’s delicate condition and its hunger for more capital, despite billions of dollars already invested in financial institutions by the federal government. Thus far, Bank of America has received $25 billion in federal rescue aid, including $10 billion Merrill Lynch would have received if the sale to Bank of America had not closed.
The Treasury has committed the entire first half of its $700 billion Troubled Asset Relief Program, although some funds remain unspent, and Congress has yet to release part two. The Federal Reserve also has wide ranging powers to intervene to aid financial institutions, as does the Federal Deposit Insurance Corp.
The talks with Bank of America were driven by Treasury Secretary Henry Paulson, people familiar with the matter said, because he was concerned that without help the deal wouldn’t close, leaving Merrill adrift. The merger did close Jan. 1 with the understanding the two sides would hammer out a plan, said a person familiar with the talks.
I must confess not to be a reader of either Merrill or BofA press releases. How could the deal close with a backstop hanging in the air? The need for government support is a material fact, and failure to report on a material fact is an SEC violation.
And we also have the not pretty fact of Paulson promising more TARP funds without clear authorization, in effect making commitments he was in no position to make, and de facto dumping them on Obama.
And we have the further fact of the BofA board approving the deal with no backstop in place, even though the claim is now made that one was needed.
This all stinks to high heaven.
And if one really wants to be conspiratorial, we have the long proven view in banking, “if you are going to have a bad year, have a really really bad year and write off everything, including the kitchen sink.” The losses are so bad that banks are not operating on that theory, but I wonder if the Merrill payoff will be made larger than necessary to hide the fact that it is also to shore up other BofA trouble areas, such as its credit card operations.