Research Editor Gil Weinreich wrote this analysis before the Sep. 6 announcement that Bank of America CEO Brian Moynihan was restructuring the company, replacing Sallie Krawcheck as head of the Merrill Lynch broker force.-Ed.
Three years ago when Merrill Lynch was tottering on the precipice of insolvency, Bank of America (BAC) stepped in and paid a premium to acquire the CDO-ruined brokerage firm—under pain of federal government retaliation if BofA backed off the deal, congressional hearings later revealed. Today the once nearly orphaned Merrill Lynch is BofA’s most successful business unit and it is its corporate parent that looks to be near the precipice.
So Bank of America on Tuesday announced a reshuffling of its businesses to try to streamline its efforts to stem the bleeding. Salle Krawcheck, who led the successful Merrill Lynch wealth management unit, was forced out.
On Friday, the government dealt another blow to BofA. The Federal Housing Finance Agency (FHFA) sued more than a dozen big banks for misrepresenting the value of mortgages they securitized leading up to the subprime mortgage crisis. Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank are on the list of 17 defendants. While most banks have been weakened in the economic crisis of the past few years, Bank of America was already arguably the most vulnerable of major U.S. banks before Friday's news.
The total price tag for the mortgage-backed securities sold to Fannie Mae and Freddie Mac by the firms named in the lawsuits was $196 billion, according to The Associated Press. The government didn't say how much it is seeking in damages. It said it wanted to have the securities sales canceled and wanted to be compensated for lost principal, interest payments as well as for attorney fees.
Given that Bank of America is also the largest servicer of residential mortgages in the U.S., the suit is particularly damaging. BofA also bought Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009, all three are being separately sued by the government for mortgage-backed security sales totaling $57.5 billion.
Bank stocks closed sharply lower on Friday on news of the suit, with Bank of America tumbling 8.3%, JPMorgan Chase falling 4.6%, Citigroup losing 5.3% and Morgan Stanley's ending down 5.7%. In early trading on Wednesday, BAC was up 3.7% to $7.25.
How the mighty have fallen. As an incipient economic recovery seemed to bring the promise of healing to America’s major financial institutions, BofA and other large banks issued highly encouraging earnings reports at the start of this year. Fewer bad loans, delinquent payments and defaults on credit card portfolios helped.
Three quarters of the way through the year and the economy looks poised for a slowdown, if not outright recession. But while the major banks’ stocks are all down year to date, BofA’s has taken the biggest hit, down 46% year to date compared to 18% for JPMorgan.
Now, before even the filing of the FHFA suit against BofA, Friday’s Wall Street Journal reports that the Federal Reserve is asking BofA to suggest contingency plans it might undertake to arrest a dangerous slide in its stock. BofA has reportedly listed the issuance of a separate tracking stock for its profitable Merrill Lynch subsidiary as one such option.
The Charlotte, N.C.-based bank has taken a number of measures to shore up its weak position this year, including mortgage-related settlements worth $12 billion, sale of its Balboa Insurance unit, half of its China Construction Bank business, its Canadian credit card portfolio as well as other pending sales, The Journal reports.
Billionaire investor Warren Buffet announced a $5 billion investment in the firm last week, a welcome respite in a month where the bank lost $16 billion in market cap in a single day in early August.
The bank has made serious misjudgments and stands accused of serious mortgage fraud. Now that it is tottering, will its Merrill Lynch profit center be sufficient support to keep the bank standing through the storm ahead?