seekingalpha.com/article/115277-how-the-government-forced-bofa-to-marry-merrill-lynch
BAC) chief executive Ken Lewis had coveted Merrill Lynch for quite some time. So when Merrill CEO John Thain contacted Lewis to ask if his bank was interested in buying Merrill, Lewis jumped at the chance.
September 15, 2008, Lehman filed for bankruptcy and Bank of America announced it was acquiring Merrill Lynch. Despite the financial tsunami that immediately ensued worldwide, Lewis proudly announced Bank of America would acquire Merrill in an all stock deal valued at $50 billion, or $29 a share. Indeed, during the conference call to announce the deal, Lewis bragged that no government assistance was required to consummate the marriage. It seems Lewis was so besotted with his corporate fianc that he was willing to overlook not only how rapidly the financial system had deteriorated, but also the manure piling up from the "thundering herd" in losses emanating from commercial real estate bonds and asset-backed securities.
Treasury Secretary Paulson who told him Bank of America had to consummate the marriage. Lewis told them he would invoke a "material adverse change" clause in the contract to cancel the deal based on his newfound financial knowledge. Bernanke and Paulson responded that doing so would reflect not only the bank's lack of due diligence in acquiring Merrill, but Bank of America's inability to meet its commitment. They said that Bank of America's failure to consummate the deal would cause further systemic risk to an already fragile financial system.
Treasury with the approval of the Obama administration injected an additional $20 billion into Bank of America in exchange for preferred shares paying an 8% dividend. The Treasury, the Federal Reserve, and the FDIC agreed to backstop up to $118 billion in "selected capital markets exposure" (75% of which is Merrill's) for an additional $4 billion preferred stock plus warrants.
Larry Summers, Bank of America was forced to shave its 32 cents per quarter common dividend down to a penny. No doubt the next phase of the saga will be shareholder lawsuits as lawyers try to determine what did Ken Lewis know about Merrill and when did he know it? And it's not just the shareholders who are angry that the value of their investment has been severely diluted. Ken Lewis will be 62 on April 9, raising the possibility that Bank of America's Board of Directors might allow him to announce his retirement rather than be fired. Regardless of whether Ken Lewis and John Thain remain at Bank of America, questions should be raised concerning the government's insistence that the deal be consummated under its original terms.
There is still no consistency as to who lives and who dies, who is merely tortured and who is rewarded with mercy. Bank of America won't be a "bank of opportunity" for shareholders until they buy their way out. But just like the Mafia and the roach motel, once you get in it's nearly impossible to get out.
So far we have 18 months supply in housing inventories, about 600,000 new house starts and building permits, rising foreclosures, etc. all these factors creat a glut in the housing market that needs to be corrected. A Federal bann in new housing starts is a must, with it the equilibrium will be faster to be reached as well a better economy stand.
I realize that we are in a financial crisis, but CEO's should not abandon common sense - or their shareholders. Owners of a healthy bank should not be forced to pay the price to save a failing one. The owners of BAC were deceived by both Lewis and MER Furthermore, our government officials forced a private company to single handedly take on the burden of rescuing a failing institution. In the process the owners of the healthy private bank were screwed out of their equity and dividends.
Lower interest rates, fewer job losses (and therefore more housing demand), and banks able to loan money will together start the process of absorbing the oversupply of housing.
The speed at which BAC is deteriorating suggests that he may have a week or two at most. Jim Hance could quickly step in as CEO for a 2 year transition period or Al DeMolina could step in as permanent CEO (as bad as BAC is it's Shangrila compared to what was required to save GMAC). Others that need to go include Joe Price (who led due diligence on LaSalle, Countrywide and Merrill and himself to be far beyond his capability), Amy Brinkley (who is among the worst CRO's of all time), Liam McGee who insisted ion the massive expansion of BACs mortgage and Home Equity businesses even as the market was exploding and Steel Alphin (the HR puppet who has been Lewis chief enabler in purging the company of any and all succession candidates). Nothing would improve morale at BAC more than to see Lewis and Alphin escorted from the building. Everyone knows that Temple Sloan defines the term gentleman, but now everyone wants to know if he also has the courage and backbone to do the right thing.
So houses should work just as oil does, lower the price and sell. Once the cost of housing drops down, the economy will be back on track. The average home price is 180k, or so right now, but people can not pay that much. If houses drop to 120k, then, and until that happens the market will be back on it's feet. The further we wait to lower the price, the worse it will get. Get real, I didn't want to pay $4 a gallon for gas, so they lowered the gas price by half.
Thain said the positions which led to the deterioration in earnings were legacy. Therefore they should have been examined at the time of due diligence. As for the shareholders, let's hope the new administration is willing to inherit the mistakes of Paulson/Bernanke/Lewis in respect of more losses. Clearly lawsuits will start springing up, and heads will roll. Will the shareholder get an escape route, is the question.
Not that is was a decision, it was a choice by the leader. What else has the leader been up to when it comes to decision making and personal wealth? Shareholders and regulators should demand an inquiry to any hedging of personal shares (as compensation) that Lewis and his managers may have participated in over the last 2 - 3 years. These cronies have been awarded hundreds of thousands of dollars as bonus money in the form of shares. No doubt they had a vesting or holding period, but can you imagine Lewis being awarded a bonus of say $1 million dollars with a holding period of three years and be held to market price flucuations that could result in him actually receiving less? That would be like saying, "Here Ken is your $1 million dollar bonus but we have no idea what its actually worth upon cashing out." So did Lewis and any of his managers put on an over the counter collar on any awarded shares and when did they do this and more importantly did they do it at a time of being in possession of material information or when they where making decisions impacting shareholders. They will give up some upside (selling a call) and be protected from some downside (buying a put). As an otc trade, it doesn't hit the tape so nobody notices and the holder of the collar has protected his/her wealth. Now shouldn't this be a disclosure requirement in all financial statements? We do get their share holdings but not on their personal hedging, if any, against those shares. Seems like we all know why, just nobody doing anything about it.
I say they're bad, if you disagree, well, the deal's off. If they're not bad, then the deal can't go through and you won't get your bonus. Next week, B o A lackey gets semi-official numbers, then calls Bernanke & Paulson....
Website I actually like what BAC have done, it was an all stock deal and included a chunk of BLK which is valuable. The problem is everyone is so short term, in a couple of years Ken Lewis's aquisitions may look amazing value, but the public and the government want to interfere and ruin any long term thinking for short term political gain. Same situation in UK, lets punish the banks, sure we will give them money, but we will make them pay 8-12% interest (which they can't afford) and wipe out shareholders. After all shareholders and rich greedy people who deserve to be punished.
|
http://csua.com/feed/