Merrill take-over by BofA, an informed decision?

September 16, 2008

Merrill take-over by BofA, an informed decision?

Yesterday I expressed my concerns regarding the rational behind the take-over of Merrill Lynch. Today several commentators are wondering why BofA is willing to pay much more than the market value. It seems obvious there is more to it than the public at this moment knows. What is in it for BofA? Maybe there is a reason to share this with BofA’s shareholders? The initial view of analysts is that it probably is a forced deal and I’m inclined to agree with this. One day after the “deal” the is a general concern whether or not BofA can absorb Merrill’s troubles. It is almost impossible to make an informed decision on such a short notice. What guarantees have been given to BofA to take this risky jump in the dark? Another interesting question is whether or not it is possible to manage two take-overs in a period that is causing serious problems for every company in the financial industry.

From a BofA perspective a Lehman take-over would have been much more transparent. Although the risk management of Lehman proved to be inadequate, the management of Lehman in general has a much better track record when you look at business ethics or management integrity.

In the past year Merrill has been accused of many things except high moral standards. I’m really curious how many billion dollar surprises will emerge once BofA really takes over control. Revisiting the credit crisis events show that a reduced level of management integrity proved to be a reliable key risk indicator of corporate failure in difficult economic times. To substantiate this I’ve included a list of Merrill events covering the last 12 months. This list was extracted from the Riskfriends guided analysis. BofA shareholder read and think again!

Date	Event	Detail
2008-09-14	Take over	Bank of America did take over Merrill although it was published as a merger. No surprise here, this is less a surprise than Lehman given the pattern of incidents.
2008-08-21	Law suits	Agreed to buy back $ 12 billion of ARS and pay a fine of $ 125 million.
2008-08-04	Integrity concerns	Merrill suspected of colluding with UBS manipulating the auction rate security market by selling short term investments as cash like, by knowingly keeping a market alive while it was in trouble since 2006.
2008-07-29	Capital ratio recovery	Planning to raise another $ 8.5 billion
2008-07-29	Investment lost	Lone Star Funds buys CDO’s from Merrill for a purchase price of $6.7 billion. (Notational $ 30 billion, 1st quarter value $ 11.1 billion).
2008-07-23	Law suits	Los Angeles accusation of fraud and antitrust
2008-07-18	Capital ratio recovery	Sold Bloomberg part back to the company for $ 4.4 billion.
2008-07-18	Write off	Totaling $ 9.4 billion, 30 percent CDO, 30 percent credit valuation adjustments, 20 percent investments in US banks and the rest in real-estate exposure
2008-07-07	Capital ratio recovery	Selling parts of Bloomberg and Blackrock to raise another $17 billon
2008-06-26	Prediction	$ 4.2 billion write off predicted for the second quarter
2008-04-18	Law suits	Pension fund CtW investment group will start a campaign against banks due to subprime related losses.
2008-04-18	Job cuts	2900 jobs in reaction to write down
2008-04-17	Write off	$9.5 bllion
2008-04-02	Capital ratio recovery	$12.2 billion raised so far
2008-03-18	Liquidity issues	Wachovia states that the exposure of Merrill is 3.3 the industries average. Subprime CDO totals to 30.4 billion dollars.
2008-03-11	Integrity concerns	Congress questions Stanley O’neal about his compensation after bringing his company to its knees.
2008-03-06	Job cuts	Merrill Lynch said that it would stop making subprime mortgages through its First Franklin Financial unit and would eliminate 650 jobs
2008-02-27	Investment lost	Auction rate securities from Merrill frozen making it impossible for individuals to withdraw their savings.
2008-02-26	Management leaves	CEO O’Neal steps down
2008-02-08	Investigation	SEC received request for information from the federal prosecutors gathering information in the Merrill activities in mortgage securities.
2008-02-07	Integrity concerns	Accused by Massachusetts of fraud
2008-02-01	Investment lost	Merrill buying back $ 14 million of CDO’s from the city of Springfield. These CDO’s lost 90% of value.
2008-01-16	Write off	$ 9.8 billion loss, write down $14.1
2008-01-15	Capital ratio recovery	$ 6.6 billion cash raised issueing preferred shares
2008-01-14	Integrity concerns	Finra investigating possible front running
2008-01-11	Portfolio deterioration	$15 billion write down expected
2008-01-04	Integrity concerns	Accused from hiding losses while merger was pending
2007-12-24	Capital ratio recovery	$ 7.5 billion acquired selling shares 13% below market value.
2007-11-08	Integrity concerns	SEC starts investigation investments
2007-11-07	Portfolio deterioration	Expected write offs 4th quarter another $9.4 according to CreditSights
2007-11-03	Integrity concerns	Merril not aware of inappropriate transactions, not denying it.
2007-10-31	Law suits	Lawsuits by shareholders

Permalink