Just A Song Before I Go

Today being a holiday, I will make things short and sweet. First: Bank of America is receiving much criticism for first not doing its due diligence when agreeing to acquire troubled investment bank Merrill Lynch in September and then for asking for government capital last week because or higher than expected losses at Merrill. Although I was uneasy of BAC acquiring MER without TARP funds (MER and another large troubled institutions have the most toxic assets in terms of both quantity and toxicity), I was hopeful that BAC CEO Ken Lewis could pull it off.

According to the Wall Street Journal, Mr. Lewis was considering backing out of the deal to acquire Merrill in December only to be pressured into closing the deal by Treasury Secretary Paulson and Fed Chairman Bernanke. This could be a first in the history of U.S. business. A major corporation was forced to close a deal after determining that it is no longer a sound business decisions.

Questions regarding BAC's poor due diligence may be fair, but are reasons that mergers and acquisitions often close months after they are agreed upon. One reason is that it takes that long for the legal aspects to be addressed. Another are the logistics of efficiently integrating two firms (some firms never addressed this). Yet another is complete information discovery. During BAC's closer at MER's books and businesses, BAC apparently became concerned. Concerned enough to want out. After being subject to a shotgun wedding, forced by the government who can blame Ken Lewis for asking for TARP money. Whether or not BAC was trying to prevent a systemic collapse when it agreed to acquire Merrill on that tumultuous weekend in September which also saw the Lehman bankruptcy and the government's seizure of AIG, but that is exactly what it did. Since the vast majority of mortgage-related losses at BAC come from Merrill Lynch (dwarfing even Countrywide's losses), BAC is likely to get any assistance needed from the government. After all, another large bank received similar additional aid after causing its own crisis.


Another bank having trouble is the Royal Bank of Scotland. The Wall Street Journal is reporting that RBS has announced that it will suffer a "huge" loss for 2008, possibly more than $41 billion. Word out of London is that RBS will probably need more government capital. Some estimates put the eventual government ownership of RBS at 70%, up from the current level of 58%.

Thus far, the British government has not forced RBS to eliminate its preferred dividends. That however, may not be the case going forward. As RBS preferreds are non-cumulative, investors relying on RBS preferreds for income may wish to swap into investments more in line with their risk tolerance and investment objectives.