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While everyone is talking about a rough day ahead for the financial sector, it's worth noting that Monday will reveal a surprise stock move in the financial sector: Merrill Lynch.  It is being bought for roughly double its stock valuation from Friday's close. It is an all-stock deal, and will dramatically up its stock price.

BAC is offering $50 billion, above Merrill's Friday market capitalization of $26 billion.  Though the deal is in stock, not cash (which means the stock will now track more to BAC's stock and come down a bit), the new valuation will still be a substantial gain for Merrill investors.  The way BAC is talking about it, BAC is getting a good deal.  They're getting Merrill at a fire-sale price, with huge gains down the road.  It's tacking on almost a trillion in assets to its company.   Forbes

You have to wonder if this "bail-out" isn't coming under the cover of Lehman Brothers' rapid choice to restructure.  Similar to the covert takeover of JP Morgan with Bear Stearns (an offer which was later upped substantially), Bank of America finds itself with enough leverage to take Merrill's near 1 trillion in assets off its hands.  What a nice guy!

Which brings me to the larger issue: should we really feel bad for these companies?  I feel bad for those owning Lehman stock, but my feeling with these takeovers and bail-outs is -- in part-- why should we feel bad for these big players?  When does the government bail-out small companies?  The kind of companies that wind up getting bought up by these big fish?  

They say these companies are different they're "too big to fail" and yet, should we really feel bad for them? Should we really feel bad when things don't go their way?

The whole reason a lot of these companies got so big was not because they were so good at developing and selling products/services, they became these unwieldy creatures through buyouts and mergers.  They live off the fat of good times-- Do you know the starting salaries at Lehman?  Do you know how much their execs make?  It's a lot.   They were powerful last year, top of their group... but now they are no longer a big listed corporation to put others in their place, but a company of many frightened people with suits and ties scurrying to save their jobs and salaries that could suddenly disappear.  Big salaried jobs...

* UPDATE *  To clarify, I don't recommend buying Merrill Lynch-- It's nice if you own it already, but I don't recommend buying it.

Originally posted to yammatal on Mon Sep 15, 2008 at 12:12 AM PDT.

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Comment Preferences

  •  Well, maybe Prez. Sarah will (8+ / 0-)

    take over Lehman Brothers so she can put it up for sale on e-Bay.

    "Que importa la raza / tampoco el idioma / si al fin lo que cuenta / es lo buena persona". Carlos Vives

    by flitedocnm on Mon Sep 15, 2008 at 12:18:15 AM PDT

  •  Basically BA just bought itself (4+ / 0-)
    Recommended by:
    deepeco, Seneca Doane, oxfdblue, ladona

    An investment branch...

    "Polls are like crack, political activists know they're bad for them but they read them anyways."-Unknown

    by skywaker9 on Mon Sep 15, 2008 at 12:19:09 AM PDT

  •  It's like nobody's in charge! (6+ / 0-)

    It's like an orgy of looting by the insiders.

    It IS.  It's nothing but white-collar looting as the disaster hits.

    Outrageous.

  •  The stock had last closed at $19 (1+ / 0-)
    Recommended by:
    mattman

    But I guess when you're buying all the stock, that includes the stock of those who hadn't planned to sell.  Remember, when you buy all the stock available at 19, you have to start buying the stock being offered at 19.01, etc.  Still, I doubt that Merrill stockholders a great negotiating position.

    I don't know who to feel bad for, but -- with my retirement invested in a big mutual fund -- I'm probably one of those for whom I should feel bad.

    John McCain's Court will overturn Roe; don't kid yourself.

    by Seneca Doane on Mon Sep 15, 2008 at 12:23:56 AM PDT

  •  which doesn't mean (1+ / 0-)
    Recommended by:
    mattman

    one should put in an order to buy at market open.  don't do that.  yikes.  who knows what that will lead to.

  •  I thought they were offering $44 billion (0+ / 0-)

    $27/share

    That's what the WSJ was reporting.

  •  Merrill is insolvent,,,, BAC has 3 to 4 months (6+ / 0-)
    Recommended by:
    skywaker9, mattman, mbayrob, kurt, Number5, vrunner

    to complete the all stock deal. BAC stock dropped as low as $18, just a few weeks ago, and recovered to trade as high as $35, then it went back in the $20's and closed near $34 on friday. Merrill and BAC non-retail banking have the same business model as Lehman's and the Wall Street CEO's refused to back their own now failed model. We know it failed, because Bear and Lehman failed, and Merrill is on the brink. BAC has approval to do proper DD of Merrill's book of assets and liabilities....it has certainly not been complered. In the next 3 to 4 months, BAC stock could be back to trading at $18, and BAC could also find Merrill to be insolvent before the deal is closed, the acquisition is contingent on Merrill's financial condition.
    Wall Street finance dies this weekend. There will be shortcovering at the open in a few hours that could cause Merrill to open above $29...where would you attempt to buy it? BAC shares will be heavily shorted on this news...if you see value in this, and I don't.... why not buy BAC shares...say...late in the week after the market digest the losses in LEH, AIG, WM, and who knows where else, and after arbitrage traders have purcahsed Merrill and short sold BAC, which is what they do in response to these "deals". They play the spread, they do not take the risk of simply buying Merrill and holding it without the protection of an equal short BAC position.....

    •  If Merryl is insolvent, how much can it be worth? (1+ / 0-)
      Recommended by:
      mattman

      I'm guessing that the Fed and the Treasury are giving terms that sweeten this up a lot in order to "justify" a price of twice Friday's.

      What's your guess as to what else is involved in this deal to make it less crazy? B of A aint' doing this for charity.  As a customer, I'm sure of it :-(

      "If another country builds a better car, we buy it. If they make a better wine, we drink it. If they have better healthcare . . . what's our problem? "

      by mbayrob on Mon Sep 15, 2008 at 01:13:43 AM PDT

      [ Parent ]

      •  There is no guarantee this will happen (2+ / 0-)
        Recommended by:
        adrianrf, yammatal

        It's a bandaid.....propaganda to soothe the market, to keep it from crashing. Bank of America, if it had to mark all of the dubious loans outstanding, that it is exposed to, is most likely insolvent, too.

        It's about the leverage. Banks are permitted to lend a max, of 14 times assets....if seven percent of the total amount a bank is holding loans on, go into default, and it has lent the max of 14 to 1....the bank is reduced to only it's reserve capital, and banking regulators must take it over and sell it's assets and merge it into another bank.

        B of A has a lot of garbage loans on it's books, which is why it's stock price sank as low as $18 per share, just weels ago. Merrill could be leveraged 30 to 1...which is why IB's like Merrill should not have been permitted, the privilege formerly reserved for banks to exchange dubious illiquid collateral to the Fed for treasury bills that are then sold to raise cash. This "sale" is a joke, both of these companies are walking dead, and the Fed is buying time, for Bush to leave office, and take Paulson with him, if theu can string this out. The have to hide the depressed assets that they say are "illiquid"...they aren't....they all, with help of Paulson and Bernanke's blind eye and loans, avoid selling their depressed crap at "Mark", the market price these assets will sell for today. As they delay marking them to reality pricing, the price has declined further. If B of A and Merrill were both forced to price all "assets" at today's price, the only REAL price, they are both bankrupt....

        •  What's to keep the short sellers away from B of A (0+ / 0-)

          Yeah, I had enough finance back in the day to understand the relationship between leverage and volatility.  Was never good enough at it to make any money with it, sadly.

          So a couple further questions: is it clear from the balance sheets of these companies how badly leveraged they are?

          And in the case of B of A -- if you're right, you aren't likely the only one who knows this.  I'm guessing that there's a way to short B of A here that is potentially lucrative to somebody.  So is the $70B enough deterrence to keep someone from shorting B of A to death?  And can the Fed or the SEC do anything to keep someone from doing it.

          Entropy I'm told is the strongest force in the universe.  But I'm pretty sure that arbitrage is a close second.

          "If another country builds a better car, we buy it. If they make a better wine, we drink it. If they have better healthcare . . . what's our problem? "

          by mbayrob on Mon Sep 15, 2008 at 02:20:25 AM PDT

          [ Parent ]

  •  Any firm accepting Fed money (11+ / 0-)

    as part of a bailout should be barred by the SEC from accepting any kind of severance or bonus pay. You run a firm into the ground while losing billions of other people's dollars, you don't deserve a damned penny.

  •  short , short (1+ / 0-)
    Recommended by:
    mattman

    as i told my financial friends a few months ago.

  •  BAC... (0+ / 0-)

    Blood Alcohol Content?

    Sorry, I'm as bad as McCain when it comes to understanding the economy.

    •  Probably, but I'm guessing (0+ / 0-)

      Bank of America Corp

      One of the interesting initiatives we've taken in Washington, DC, is we've got these vampire-busting devices. - George W Bush, Denver, August 2001

      by pucklady on Mon Sep 15, 2008 at 03:27:25 AM PDT

      [ Parent ]

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