Bank of America, Merrill Bailout Disguised as Buyout?
Companies / Credit Crisis 2008 Sep 15, 2008 - 09:12 AMBy: Mike_Stathis
Bank of America's buyout of Merrill Lynch seemed laughable to me - that is until I realized the full picture. With a $50 billion all-stock deal valued at $29 per share, at first glance it might appear that Bank of America doesn't stand to lose much considering its stock is at least 50% overvalued by my analysis. However, even at an adjusted price of $25 billion, Bank of America will be responsible for absorbing all of Merrill's losses. Good luck. But wait. They don't need luck, they have the Fed. 
I could care less about Merrill's 49% stake in Blackrock. No financial institution is infallible under these conditions and only an idiot would rush in to buy Merrill at $50 billion. They are on the hook for a huge amount of mortgage securities. And their brokerage unit has been fighting a massive decline for years. In fact, I expected them to eventually sell it off.
While I can guarantee you all bank CEOs are lost in the woods, Bank of America's CEO, Kenneth Lewis can't be that stupid. Think about it. Lewis already committed to a buyout of troubled Countrywide well before he realized how bad things would get. How much blind risk can Bank of America handle? A lot if they are given a blank check by the Fed. And the fact is that they have been, along with the rest of the banking cartel. I'm quite confident Lewis was approached by the Fed and U.S. Treasury with promises of extra assistance, if needed, in exchange for buying Merrill. That is precisely why the bank offered a 70% premium for the struggling firm. Think about it. Merrill was on its way to single digits so why not wait? Better yet, why offer a 70% premium to its Friday closing price? This is the worst banking crisis in U.S. history and they're offering 70% premiums?
It appears as if we are witnessing government bailouts using taxpayer money that are being deceitfully disguised as buyouts. Not just with the Merrill buyout but also this newly established $70 billion emergency bank fund, set aside to help out banks with future problems. Where do you think this money is coming from? The banks certainly don't have it. It is coming indirectly either from the Fed or the U.S. Treasury. That is precisely why the Fed just opened up the types of securities for Schedule 2 auctions that can be used as collateral for borrowing from the Term Securities Lending Facility. Now all investment-grade securities can be pledged. In addition, the amounts auctioned have been increased by $25 billion to $200 billion. The problem is that what may be investment-grade today could easily become junk next week. In fact, as I have stated in the past, we are going to see a huge junk bond market soon. Already, corporate defaults are soaring.
You see, the banking cartel – the guys that own the Federal Reserve – have been given a blank check and will make it through this crisis. JP Morgan Chase is already dealing with Bear Stearns so now it was time to ask Bank of America to take over Merrill. And while the money might not be coming directly from the U.S. Treasury, what's the difference? Anyone holding dollars is getting screwed because all of this extra printing is destroying the currency.
I recall reading Friday an analyst form Citigroup stating Merrill's “liquidity position is strong and that exposure to volatile businesses is lower relative to its peers.” http://news.moneycentral.msn.com/ticker/article.asp..
If that's the case, then it looks like all the banks are on the verge of complete failure. When are these analysts going to stop with their lies? By now, we should come to expect the Friday close of the next bank failure.
Now, let me show you an excerpt from a June 25, 2008 article I wrote http://seekingalpha.com/article/82623..I want you to focus on the section titled, “A Final Word of Caution”….
“Those of you looking to make easy money in the financials like E-Trade (ETFC) need to think again. The risk is too high right now. I find it amazing how so many who have taken a long position in ETFC cite the company's impressive book value as some sign of value or financial strength. Understand that book value is used in the event of liquidation of assets in bankruptcy and therefore usually has no impact for common stock holders. In addition, book values of financials are meaningless since the banks have overvalued their debt. Finally, book values typically have no way of fully accounting for the type of massive leverage the banks have built. If you were not aware of these basic facts, you really need to sit this one out, save your cash and wait for the next bull market, when nearly everyone does well.
Even Citibank (C) has considerable downside from here, as does Bank of America (BAC). Over the past year, I have made many recommendations to short the financials. Earlier in the year, my attention was focused on Lehman Brothers (LEH) and American International Group (AIG). The story on these guys is far from over but I would wait for a rally before going short again. The next short to consider will be Merrill Lynch (MER). When MBIA (MBI) and Ambac (ABK) get another downgrade, MER will be in deep trouble due to their large exposure to insured mortgage debt. That said, you might be wondering why MER is already near a year low. It's quite simple. All that I have told you about Merrill's risks is widely known. But that does not mean it can't go lower. However, unless you are very experienced with shorting, you need to stay away from this strategy.
Will there ever be a time to pick up the financials? I doubt I will bother to pick up any of these (other than for short-term trading) even when I sense the bottom has been reached because the climb back up is going to be very slow and small. The dilution that has and will continue to occur will crush earnings for many years.”
So which major bank will be next to go under? Whatever bank that ends up being, Citigroup is certainly in no shape to help out. Even with the Fed's printing presses they are going to struggle to survive. Most likely, Citi will sell off a few of its businesses before it's all over. So the question is, which member of the banking cartel will be asked to step in and buy Washington Mutual.
By Mike Stathis
mike@apexva.com
Copyright © 2008. All Rights Reserved. Mike Stathis.
Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.
The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.
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