Bank of America - Merrill Lynch Merger

[monsoon]

A lot of car adverts are filmed in Vancouver which oddly enough, looks a lot like Charlotte from certain parking lots.

[monsoon]

Wells Fargo stock briefly dropped to right at $12/share today. When they announced they were going to acquire Wachovia last October their stock was right at $37. At the time this was called a brilliant move and Wells was regarded as a well run bank, a bank that had not made bad decisions in the risky mortgage department like the Charlotte banks.

This means that while Wells paid about $15B for Wachovia, this decision has cost them $100B in stock value. Another staggering loss. Considering the feds have also handed them $25B this does not seem like such a good decision on their part.

[DanRNC]

Wells is heading to become a zombie bank like BofA and Citi.

[krazeeboi]

They should have just let the banks fail. It would have been nasty and painful in the short term, but necessary IMO. I know banking is Charlotte's bread and butter, but I don't want to see the entire country dragged through hell due to the mistakes of big wig CEOs of a few banks, including Wachovia and BOA. I think the banks that acted responsibly would have eventually taken up the slack.

[atlrvr]

Wells Fargo stock briefly dropped to right at $12/share today. When they announced they were going to acquire Wachovia last October their stock was right at $37. At the time this was called a brilliant move and Wells was regarded as a well run bank, a bank that had not made bad decisions in the risky mortgage department like the Charlotte banks.

This means that while Wells paid about $15B for Wachovia, this decision has cost them $100B in stock value. Another staggering loss. Considering the feds have also handed them $25B this does not seem like such a good decision on their part.

I'm not sure how the decline in share prices can be attributed to the purchase of Wachovia. For example, Citigroup was at $23 up until Wells outbid them, now they are a $3.60, which is an 84% decline, as opposed to Wells which has experienced a 68% over the same time frame. Citigroup market cap has declined $105B.

Based on the simplicity of your analysis, I can thereby claim that Citigroup NOT buying Wells has cost them even more than if they had purchased them, so perhaps Wells was brilliant after all, because things could have been worse. I'm not claiming that is was brilliant, rather that it is an analogous assumption.

Also, consider BB&T, long considered one of the most conservative banks around, and who has made no significant acquisitions during this era of poor earnings. BB&T made a PROFIT in the 4th quarter 2008, and annually made a profit of 85% of what they did in 2007. Over the same timer period (October 1 to now) their stock still declined 62% in value, nearly as much as Wells.

The point being, to peg their decline in the purchase of Wachovia is ridiculous. Every large bank is getting hammered, and the margin of getting hammered between the best run and worst run banks is pretty negligible, especially if traditionally sound principals of earnings ratios were used.

[Commoner]

BAC's purchase of Countrywide is a popular rallying point some of the harshest non-industry critics of BAC's operations in the midst of the ongoing crisis. They might be surprised by the article linked below, which describes how Countrywide's mortgage origination infrastructure has filled an obvious gap in BAC's capabilities, especially during this refinancing boom.

http://www.charlotteobserver.com/597/story/546197.html

I'm not sure how the decline in share prices can be attributed to the purchase of Wachovia. For example, Citigroup was at $23 up until Wells outbid them, now they are a $3.60, which is an 84% decline, as opposed to Wells which has experienced a 68% over the same time frame. Citigroup market cap has declined $105B.

Based on the simplicity of your analysis, I can thereby claim that Citigroup NOT buying Wells has cost them even more than if they had purchased them, so perhaps Wells was brilliant after all, because things could have been worse. I'm not claiming that is was brilliant, rather that it is an analogous assumption.

Also, consider BB&T, long considered one of the most conservative banks around, and who has made no significant acquisitions during this era of poor earnings. BB&T made a PROFIT in the 4th quarter 2008, and annually made a profit of 85% of what they did in 2007. Over the same timer period (October 1 to now) their stock still declined 62% in value, nearly as much as Wells.

The point being, to peg their decline in the purchase of Wachovia is ridiculous. Every large bank is getting hammered, and the margin of getting hammered between the best run and worst run banks is pretty negligible, especially if traditionally sound principals of earnings ratios were used.

Dead on. Among the FHCs most often cited on this board (JPM, C, BAC, WFC, USB, RF...), I don't think any single FHC's decline in price per share (or market capitallzation, if you choose) differs notably from the XLF SPDR (a product mimicking the financial component of the S&P 500 index). The purchase or failure to purchase Wachovia is a red herring.

Wells is heading to become a zombie bank like BofA and Citi.

Meredith Whitney, until yesterday the leading financial sector analyst at Oppenheimer, would agree. She gained notoriety for calling Citigroup out in early 2007, and then forecasting the demise of National City, Washington Mutual and Wachovia as a result of inadequate loan loss provisioning. Wells Fargo was also on her death watch list. She also gained notoriety for marrying a professional wrestler.

[monsoon]

Since you guys are using other's opinions to argue your point, I will point out that if you had gone looking for negative commentary on the Wells purchase of Wachovia in October, you would not have found any. I remember words such as genius move, great for Charlotte, brilliant, they were so crafty in stealing this from Citi, etc etc. Now it is a Zombie bank? lol Now we are to believe these people who are good to call something after the fact, know what they are talking about?

I am going to stick to my own analysis of the situation as I really don't care for battle of the links. Wells stock had two big dives in it's price since the deal was announced. The first occurred in November when it announced that had to sell stock to raise $12B to help pay for the WAC deal. The second started on the day the deal with WAC was completed which happened to be when the ML stuff was hitting BofA. The two drops are unmistakable and I don't think Wells would have gone down this path if it were not for Wachovia.

I think I have been correct about a number of items that I have posted here that have gone against popular opinion. I still argue that if Wells had not taken on Wachovia it would be in much better shape than it is now. And if Wachovia had gone to Citi, Charlotte would be in much better shape now because the deal the government would have thrown into that deal, is much better than what we are going to see happen with Wells now. The entire toxic mortgage mess would have been over with for Wachovia in October and there would have also been an independent Wachovia bank with a great deal of employees still HQ'd in Charlotte.

[DanRNC]

I would have never said that the Wells purchase of Wachovia was a good move as most banks still had a ton of CDOs floating around. I had said a long time ago that these banks still hadn't taken all the write downs so they were all in terrible shape and things were going to get much worse. I think it was the Charlotte Chamber/Pat McCrory that had been promoting these moves as great things for Charlotte.

[HopHead]

I would have never said that the Wells purchase of Wachovia was a good move as most banks still had a ton of CDOs floating around. I had said a long time ago that these banks still hadn't taken all the write downs so they were all in terrible shape and things were going to get much worse. I think it was the Charlotte Chamber/Pat McCrory that had been promoting these moves as great things for Charlotte.

There was no "good" scenario for Wachovia. Given the options of: Citi, Wells and going under like IndyMac or Wash Mutual I think it's pretty clear Wells is the winner out of that bunch. The last scenario speaks for itself. I don't think Citi was in the position to absorb the losses that Wachovia had, even with the government's help. IMO it would've been the same scenario that BofA is going through now with trying to absorb ML, minus the $1200 trashcans. Wells is going to take it on the chin a little bit, but I think they have the cashflow to stay afloat. I think if you ask any Wachovia employee, they will tell you the same thing.

[monsoon]

Some BofA news.

• Ken Lewis has been summoned to NY State court which is doing an investigation on the legality of the payouts of bonuses to Merrill Lynch executives after Tarp money had been accepted. The timing of these bonuses seems to have been arranged so that the government would have to assume the responsibility instead of BofA.
  
• BofA's has a new strategy for Countrywide. Get rid of the name. The subsidiary will now be known Bank of America Home Loans. Some people might remember that Countrywide won the 2008 Worst Company in America Award. (did they ever accept that trophy and put it on display on N. Tryon?) The executive in charge of this company, Charlotte's Barbara Desoer, says the rebranding will be aimed at demonstrating that BofA is a "responsible lender.".
  
• The national media have picked up this term, zombie bank, coined to describe banks such as BofA. I have heard it most often in regards to BofA, followed by Citi. Maybe there is a reason for using that term as there is only one solution to a zombie problem.
  
• I am not going to predict the movement of BofA stock since trading of this stock has taken on an element of Las Vegas thrills, but right now it is poised to hit new eye watering lows today. At the moment, in pre-trading, it is at $3.73/share.
  

------------------------

Meanwhile another area bank is making the national news and getting national attention for actually using the TARP money to do some good for people. Citizens South Bank, in Gastonia, has a plan for using TARP to stimulate the housing market and will use 100% of the money for this purpose. No bonuses, no posh executive jets, no $1400 trash cans, no trips to resorts, no excessive executive pay. It's a stark difference in approaches and sense of entitlement. Several of the national news programs highlighted this bank this week.

[atlrvr]

You left out an update. BofA is hiring 1,000 new employees to what is currently known as its Countrywide unit.

[HopHead]

Meanwhile another area bank is making the national news and getting national attention for actually using the TARP money to do some good for people. Citizens South Bank, in Gastonia, has a plan for using TARP to stimulate the housing market and will use 100% of the money for this purpose. No bonuses, no posh executive jets, no $1400 trash cans, no trips to resorts, no excessive executive pay. It's a stark difference in approaches and sense of entitlement. Several of the national news programs highlighted this bank this week.

I did hear this on FoxNews this morning... It was good to hear this story. Of course naturally, Fox failed to mention where the Citizens South bank was based out of (at least I didn't catch it). I think the CEO even laughed about the $500,000 cap. He said "well, no one here is making that money."

[gman430]

You left out an update. BofA is hiring 1,000 new employees to what is currently known as its Countrywide unit.

...while laying off 30,000 other workers. A few minutes into trading and BofA is already down 17% with their stock currently trading around $3.25. Can we just let this company go already? I'm sick of bailing them out. We keep giving them everything but the kitchen sink and the situation hasn't seemed to improve at all. Even with the handouts they are not in any condition to lend. The markets know that all of this money will have to be paid back in higher taxes and that will reduce the earnings of all companies for many years to come.

[monsoon]

You left out an update. BofA is hiring 1,000 new employees to what is currently known as its Countrywide unit.

I did not know this, but I also didn't say anything about the news that BofA itself has started significant high level layoffs in it's core technology and operations unit. I assume this is on the main bank. Please feel free to shed more details if you have them.

I did hear this on FoxNews this morning... It was good to hear this story. Of course naturally, Fox failed to mention where the Citizens South bank was based out of (at least I didn't catch it). I think the CEO even laughed about the $500,000 cap. He said "well, no one here is making that money."

Indeed on the salary part. On the news, they mentioned Gastonia several times. I don't think that Charlotte was mentioned, but they did say something about this bank being in the shadow of BofA.

[Neo]

I am not going to predict the movement of BofA stock since trading of this stock has taken on an element of Las Vegas thrills, but right now it is poised to hit new eye watering lows today. At the moment, in pre-trading, it is at $3.73/share.

Let's not forget to mention that Citi is down 12% currently at $2.20/share and Wells Fargo is down 8% to $11.03/share. I'm by no means defending Bank of America, but they are certainly not alone in being slaughtered today. At the other end of the spectrum, BB&T is up 5% to $14.81/share FWIW.

[monsoon]

BofA hit a low of $2.73 (so far) today with a staggering 700 million shares traded today. This briefly reduced BofA to a $17B company. Robert Gibbs came out about an hour or so ago to downplay nationalization rumors and that seems to have stopped and reverse the down slide somewhat. In terms of market Cap, a $17B-$18B BofA compares to $46B-Wells, $76B-JP Morgan, $83B-HBC, and $12B-Citigoup. All of this was as of 3pm eastern.

[A2]

BofA shares are not worth the paper they are printed on. See ya at 2 bucks soon. Sorry guys, but I call it like I see em'. Quite frankly it is almost a good short. If one wanted to go long BofA (which is suicidal), you might want some of what Uncle Sam owns and that would be the preferred shares. Otherwise this is just a sinking ship getting ready to be a quasi-ran Gov't Institution (ie Nationalized). It is truly a sad state of affairs. Even as bearish as I have been over the last two years, I would have never predicted the shear speed in which BofA is falling from Grace. It is truly sureal.

Quite freaky, eh????!!!! Exactly One month to the Day. You have to love Technical Analysis.

Jan 20 BAC was 6+bucks (and many thought could not go lower), however fast forward to today, BAC's low was 2.53. Just shorting would have allowed you to more than double your $$$. Now it is time to play the bounce. I am going to contradict my month old quote and submit that I think Nationalization will be postponed. If this is the case (which I am banking on, pun intended), then we are about to get the Mother of all Bear market rallies in the Financials.

A2

[Commoner]

Quite freaky, eh????!!!! Exactly One month to the Day. You have to love Technical Analysis.

Jan 20 BAC was 6+bucks (and many thought could not go lower), however fast forward to today, BAC's low was 2.53. Just shorting would have allowed you to more than double your $$$. Now it is time to play the bounce. I am going to contradict my month old quote and submit that I think Nationalization will be postponed. If this is the case (which I am banking on, pun intended), then we are about to get the Mother of all Bear market rallies in the Financials.

A2

You still expect receivership, though? How? Execution of the asset purchase plan at price levels that will reveal a significant spread between book value (even marked to market) and sale price, leaving them insolvent, and going into receivership consistent with the existing regulatory framework?

I don't doubt that Swedish-style nationalization is a strong answer, but a lot has to happen to get from here to there, in my opinion.

Good call on the $2. If only I was allowed to buy...

[monsoon]

Almost 840 million shares of this stock traded hands today where 45 million used to be considered a busy day for BAC. This tells me, as I mentioned above, that trading of this stock has devolved down to high stakes gambling. Play your cards right and you can make a lot of money in a very short amount of time. Las Vegas has nothing on this and it can be done completely legally from your home conveniently on your PC. Who would have dreamed that one day all of our technological progress would allow for your own personal slot machine that's as close as the nearest wireless network. There are people who do this now on their iphone. Of course for most people, this game has been much worse than any theoretical zero sum game could ever be. It wasn't long ago they were saying $35 was a steal for this stock.

Existing regulations, rules and precedents no longer apply to banks. I see these potential outcomes for BofA:

1. Ken Lewis pulls the bank out its troubles and pays back the government the TARP funds to get them out of his business. It becomes a bank matter at that point. If he had not grabbed Countrywide and Merrill Lynch, he would be there today.
   
2. The treasury continues to hand vast sums of money to the bank and the present status quo is maintained with no endpoint. As this goes on and the pain continues to get worse, the bank will become more and more regulated. It will be nationalization by a thousand cuts. Nobody will know when we have it and nobody at that point will really care much.
   
3. Some sort of nationalization of the banking system takes place. Is this just of a few banks, all banks, does it include credit unions, and other non-traditional finance companies? Is there anyone bright enough to actually work this out. How does a government owned bank compete in a system designed to support for profit banks? This isn't Sweden. The USA banking system is unique in the world in terms of having 8000-9000 retail banks along with endless other options for handling money.
   
4. Congress forces the administration to make a couple of sacrifices to appease the the angry population and BofA is the most likely target as it has been the one most demonized. In this case sacrifice means liquidation.
   
5. Obama and the congress fix the economy by some plan that has yet to be revealed, the good times roll back in and these issues will be forgotten.
   
6. They decide to hand retail banking over to Walmart. On many levels this makes a lot of sense and for the money they are spending, may end up being a cheap solution. Many bankers might scoff at the idea, but they were horrified when it seemed that Walmart was making moves to form its own bank. They squawked like scared geese and used their vast power with the government to keep it from happening. These days, Walmart looks like a saint in comparison.
   

Take your choice. My money is on option #2 though option #6 is quite fascinating. Since we are discussing it in the Charlotte forum I don't know how any of these options might affect what we are seeing downtown except that #4 would be considered a disaster for the locals. Clearly the wheeling dealing days of Charlotte banking are gone.

[A2]

Almost 840 million shares of this stock traded hands today where 45 million used to be considered a busy day for BAC. This tells me, as I mentioned above, that trading of this stock has devolved down to high stakes gambling. Play your cards right and you can make a lot of money in a very short amount of time. Las Vegas has nothing on this and it can be done completely legally from your home conveniently on your PC. Who would have dreamed that one day all of our technological progress would allow for your own personal slot machine that's as close as the nearest wireless network. There are people who do this now on their iphone. Of course for most people, this game has been much worse than any theoretical zero sum game could ever be. It wasn't long ago they were saying $35 was a steal for this stock.

Existing regulations, rules and precedents no longer apply to banks. I see these potential outcomes for BofA:

1. Ken Lewis pulls the bank out its troubles and pays back the government the TARP funds to get them out of his business. It becomes a bank matter at that point. If he had not grabbed Countrywide and Merrill Lynch, he would be there today.
   
2. The treasury continues to hand vast sums of money to the bank and the present status quo is maintained with no endpoint. As this goes on and the pain continues to get worse, the bank will become more and more regulated. It will be nationalization by a thousand cuts. Nobody will know when we have it and nobody at that point will really care much.
   
3. Some sort of nationalization of the banking system takes place. Is this just of a few banks, all banks, does it include credit unions, and other non-traditional finance companies? Is there anyone bright enough to actually work this out. How does a government owned bank compete in a system designed to support for profit banks? This isn't Sweden. The USA banking system is unique in the world in terms of having 8000-9000 retail banks along with endless other options for handling money.
   
4. Congress forces the administration to make a couple of sacrifices to appease the the angry population and BofA is the most likely target as it has been the one most demonized. In this case sacrifice means liquidation.
   
5. Obama and the congress fix the economy by some plan that has yet to be revealed, the good times roll back in and these issues will be forgotten.
   
6. They decide to hand retail banking over to Walmart. On many levels this makes a lot of sense and for the money they are spending, may end up being a cheap solution. Many bankers might scoff at the idea, but they were horrified when it seemed that Walmart was making moves to form its own bank. They squawked like scared geese and used their vast power with the government to keep it from happening. These days, Walmart looks like a saint in comparison.
   

Take your choice. My money is on option #2 though option #6 is quite fascinating. Since we are discussing it in the Charlotte forum I don't know how any of these options might affect what we are seeing downtown except that #4 would be considered a disaster for the locals. Clearly the wheeling dealing days of Charlotte banking are gone.

^^^I would bet on #2's chance of becoming a reality. I think we are already half way there and if the common shares can dwindle to nothing they (The Gov't) could take a bridge bank and roll all bad assets off and convert current Bond Holders of the newly formed shell into ones that would retain a pure Equity stake. This would be almost a carbon copy of what Bill Seidman did in 1991 with the S&L dibacle. That, IMO, would be the best way to just get on with it already. That would mean for many large banks an equity price of $0.00 (and yes I am referring to the Big ones, including our Beloved BofA). Again, I am hoping above all hope that the tide is turned regarding Nationalization, but something tells me we are heading there, we are just doing it in tiny steps. (ie monsoons scenario of "Nationalization by a 1000 cuts").

As for the trade, I agree this is Vegas at the moment and without the proper "know how" you can lose and lose big. I am just hinting that we are going to get an oversold bounce (that should be quite large), before the downward trend begins again in a few weeks/months from now. AGAIN, PLEASE NOTE: This is just my opinion, and we all know that opinions are like noses, everybody's got one (unless your Michael Jackson, sorry I had too ). Do your own homework, before tackling any substantial trades or investments.

Once the Nationalization is realized, the next Big thing (ode to Doug Smith) will be a concern that will dwarf this current Financial Crisis. It will be a massive Currency Crisis, which will make this mess, seem like a walk in the park. Be Prepared as many a boyscout have said.

A2

[monsoon]

BofA and Citigroup are being singled out by the media as the banks that are in the worst shape. i.e. if some kind of fix is coming, it may very well be specific to these banks.

[monsoon]

Lots of rumors that option #2 or option #3 is coming for Citigroup.

[atlrvr]

The Charlotte Business Journal actually has a relatively strong journalistic piece regarding investment banking. It focuses on a specific deal (currently in litigation) that involves Wachovia and Merrill Lynch. In this case, Wachovia making a financial bet that ML was run by a bunch of morons concerned only with generating fees. See, even Wachovia gets it right sometimes

Anyway, its a pretty good synoposis of how entangled everything is, and why its really impossible to gauge how many trillions of dollars in losses there really are, and how counterparty's are impaired in their collection of gains, that in normal times would offset these losses and keep things in a happy equilibrium.

The article is probably only free today, but is a good read if you've been wondering "What the heck is structured debt, and how the hell can these things called derivatives which are supposed to be net financially neutral bring down some of the biggest financial firms in the world."

Article

[monsoon]

It's a sorted story for sure. The entire premise behind all of this mess was the idea that real estate could be made to appreciate faster than real income by removing the risk from the system. Real estate went up dramatically, which made more money for lots of people on paper, which drove up real estate, etc etc. The above is a manifestation of this system.

The entire finance/real estate cycle became a positive feedback system. i.e. Schemes to increase lending led to higher prices which encouraged more schemes. Anyone knowledgeable of systems knows that positive feedback systems are to be avoided because at best they are unstable and at worst they will self destruct with quite dramatic results. We are seeing that now.

It should not have been too hard to stand back and look at what was happening to see that an economy with real estate rising at something like 85% - 90%/decade where real income was dropping was going to fall apart. The big problem now, and one where the extent is still unknown are the people, most often middle class and higher, who are holding loans that were never meant to be paid back but refinanced instead. This doesn't work when prices start going back down.

I also think the worst is yet to come. The other problem that comes from a having a positive feedback system is that when it explodes, you first have to pay to clean it up, then you have to pay more to find something else to take it's place. (assuming you survived the explosion).

[gman430]

I opened my newspaper this morning and noticed an ad from Bank of America that took up the entire page. I wonder where they're getting this money from? They claim they need billions on top of billions from the taxpayers but yet I still see advertisements from them.