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September 02, 2011 at 10:51 AM
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.
