Bank of America - too enormous to fail
The recent bid to acquire of Merrill Lynch by Bank of America is just the latest step in a vast expansion of what was once NationalBank, a North Carolina regional bank that acquired California-based Bank of America in the 1889s. . It also is a change in strategy, away from being known as consumer bank.
As we noted in a 2007 post:
While BoA is second among US banks to Citigroup in assets, it is far ahead in:
* retail deposits (be far the biggest of all (and almost five times bigger than Citigroup)
* ATMs (Twice as big as its nearest rival, and almost six times bigger than Citicorp)
* Credit card balances (#1, and 50% bigger than Citigroup)
Over the past four years, the company has acquired large assets including MBNA (the leading credit card issuer) and FleetBoston, the largest bank in New England.
A few months ago, it acquired the remaining shares of the sinking Countrywide Financial, the largest private mortgage issuer in the US.
And now BofA is bidding for investment bank- brokerage firm-Merrill Lynch. The $49 billion bid represents a steep discount from Merrill's highst valuation, as that firm was about to sink into bankruptcy. The two deals will increase BofA's liabilities to $2.5 trillion.
The question is why? Why does BofA want to take on such risky assets, creating a far larger and harder-to-manage company. In addition, BofA's own credit card holdings would have to be riskier than ever.
One of the key areas where BofA will now be #1 in the world is in wealth management, a combined fund worth $2.5 trillion. Curiously, BofA sold its international wealth management division to Swiss bank UBS a decade ago. Now it will surpass UBS in teems of cash under management. What's really crazy is that in both deals the amount of bad debt in the mix is unknown, and only coming out quarter by quarter as mortgages default and leveraged paper becomes worthless.
But what it does is put the bank into a position of offering a fill gamut of financial services, a model that has failed over and over again, and caused large companies (like Citigroup) to retrench and exit some of its businesses..
The big benefit, and it looks like the new Bush administration bailout plans come in, is that BofA will be more than ever "too big to fail." No matter how reckless the acquisitions were, in the light of the fact that taxpayers will, it seems, swallow up much of the bad debt while allow BofA and other megabanks to hold on to the good debt, the move to buy Merrill suddenly appears as a stroke of genius.
A Bloomberg News article ("Too Big to Fail' Metric Makes Bank of America, JPMorgan Safer," 9/22/08) points this out
Bank of America in Charlotte, North Carolina, and New York- based JPMorgan and Citigroup may also get an immediate benefit from the Bush administration's plan to buy $700 billion of bad mortgage investments from financial companies.
