Many people were shocked when Bank of America agreed to buy Merrill Lynch with no financial assistance from the U.S. government. My take on this is that BAC could go back to the government for funds at any time. After all, BAC prevented Merrill and Countrywide from collapsing. A collapse of either firm would have had dire systemic consequences. Today it was announced that BAC will indeed receive money from the government to help close the Merrill deal. BAC will receive an as yet unannounced sum (measured in $billions) from the government. Merrill is being crushed under the weight of very toxic assets. I as have written previously, Merrill (and another large institution which is being broken up by order of the Fed and The Office of the Comptroller or the Currency) were not only the largest structurers and dealers of toxic asset-backed securities, but in fact, ramped up the securitization at the height of the real estate bubble in 2006 and into 2007 after most major players had long left that arena.
Could it be that BAC CEO Ken Lewis bit off more than he can chew? Possibly, one financial supermarket is being broken up, could his be next? This would be difficult. Unlike C and MS, his troubled assets lie within the part of the firm which also contains its Global Wealth Management unit. Look for a possible restructuring within BAC. Why doesn't the government just buy these toxic assets? Due to the fact that the collateral contained within many of these vehicles, there is no way that TARP could purchase assets at prices which would be helpful to banks.
Many investors continue to buy non-cumulative preferreds of the "good" banks. Although most, if not all, probably continue to pay the chance of dividend suspensions is not zero. My opinion is that the more government help an institution needs the more likely a dividend suspension. I continue to prefer (pun intended) trust preferred due to their seniority to government preferreds via their debt components. Higher yields offered by non-cumulative preferreds are not sufficient (in my opinion) to justify the risk. After all, the yield contingent on the dividend being paid. Today I had investors tell me that I was overreacting for suggesting BAC trust preferreds over the non-cumulative preferred stocks. The news of BAC's request for more aid after the close legitimizes my concerns.
4 comments:
curious about your comment about the trust preferreds. I have found nothing in any filings by BAC or in the merger agreement that spells out how these trust preferreds will be treated. I do not at this point believe there is any guarantee that BAC will in fact guarantee the trust preferreds. I own MERprK and I am specifically worried about that issue.
Do you know of ANY written statement or filing that would shed light on how MERprK is treated should BAC go the way of Fannie and Freddie or AIG. Meaning: if BAC goes belly up - is MERprK ahead of all non-trust preferreds by both BAC and MER and is it also ahead of the government preferreds recently issued?
If you think the answer is yes - then where are you getting that info?
On completetion of the merger, BAC told Moody's and S&P that it is not explcitky assuming the debt, which includes trust preferreds. It did say it was assuming the equity, which includes the nin-cum pfds.
MERprK is not legally on BACs capital structure. It is only an obligation of the Merrill subsidiary. It is ahead of teh TARP pfds.
I am getting the info on prefered structures from market knowledge. Trrust preferreds are Tier-II cap (jr sub debt). The goverment's preferreds are preferred equity. This is because the banks need to maintain their Tier-I cap ratios as per Basel-II. Tier-II cap (debt) cannot exceed Tier-II (equity (common and preferred) and deposits
If you would like to discuss more indepth, let me know.
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