Bank of America May Have to Sell Merrill To Survive# Stock
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NEW YORK (TheStreet) -- Bank of America (BAC_) could be forced to spin-off
Merrill Lynch, which is the company's most profitable unit.
More on BAC
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Statement With The Securities And Exchange Commission For A Proposed Initial
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The Goldman Sachs Group Inc| GS DOWNJPMorgan Chase & Co| JPM U.S. Bancorp|
USB DOWNAs the company faces a perfect storm of mortgage putback risk --
with daily pressure from a flurry of lawsuits, including filings by American
International Group (AIG_), a subsidiary of U.S. Bancorp (USB_), Goldman
Sachs (GS_), the Federal Deposit Insurance Corp. and a coming suit from the
Federal Housing Finance Agency, according to published reports -- Bank of
America is poorly-positioned to comply with enhanced Basel III capital
requirements, and the Federal Reserve's request for contingency capital
plans sheds light on a possible spin-off of Merrill Lynch.
Bank of America CEO Brian Moynihan
According to a Wall Street Journal report citing unnamed sources, the
Federal Reserve has requested contingency plans from Bank of America,
covering how the nation's largest bank holding company would navigate more
extreme economic uncertainty.
According to the report, the bank submitted several options to the Fed
including the more "theoretical" option of raising capital by issuing
tracking shares for the Merrill Lynch unit, which was acquired by Bank of
America on January 1, 2009, in an in exchange of common and preferred shares
, valued at $29.1 billion.
Bank of America declined to comment for this article, but mere mention of
issuing tracking shares on the Merrill unit's performance puts a spin-off on
the table.
FBR Capital Markets analyst Paul Miller says that Bank of America "has been
very good at telling people there's no way to spin it off, as there hasn't
been any sector analysis of Merrill Lynch" in Bank of America's financial
statements. "If they did any, Merrill themselves would want to be spun-off,"
Miller says, adding "if you're Merrill Lynch and you're making pretty good
money and all your profits are going to pay-off Angelo's mistakes, why would
you want to do that?"
Miller refers to Angelo Mozilo, the former CEO of Countrywide, which was
acquired by Bank of America in 2008, and which is the source of most of Bank
of America's mortgage pain.
Meanwhile, Richard Staite of Atlantic Equities makes a strong case that Bank
of America's path to compliance with enhanced Basel III capital
requirements will be much more difficult than CEO Brian Moynihan let on
earlier this year.
According to a report put out by Staite on Thursday, the analyst estimates
that Bank of America "will be $45 [billion] below proforma Basel III
requirements at end 2012." This estimate was reduced from a $50 billion
shortfall, following the company's decision to sell its international credit
card business, which the analyst says "could free up more capital than
initially expected." The estimate also factors-in the gain from the company'
s sale of half of its investment in China Construction Bank.
The recent $5 billion preferred stock investment by Warren Buffett's
Berkshire Hathaway (BRK.B_) won't boost Bank of America's Tier 1 capital
ratios, because the preferred shares feature a cumulative dividend. If
Berkshire were to exercise the 700,000 warrants that were granted as part of
its preferred investment, it would, of course, boost Bank of America's Tier
1 capital, but "given the warrants have a ten year life," Staite doesn't "
expect them to be exercised any time soon."
Merrill Lynch, which is the company's most profitable unit.
More on BAC
10 Stocks to Watch: Netflix, AT&TILFC HOLDINGS, INC. Files Registration
Statement With The Securities And Exchange Commission For A Proposed Initial
Public OfferingNo Rest for Birthday Boy BuffettMarket Activity
The Goldman Sachs Group Inc| GS DOWNJPMorgan Chase & Co| JPM U.S. Bancorp|
USB DOWNAs the company faces a perfect storm of mortgage putback risk --
with daily pressure from a flurry of lawsuits, including filings by American
International Group (AIG_), a subsidiary of U.S. Bancorp (USB_), Goldman
Sachs (GS_), the Federal Deposit Insurance Corp. and a coming suit from the
Federal Housing Finance Agency, according to published reports -- Bank of
America is poorly-positioned to comply with enhanced Basel III capital
requirements, and the Federal Reserve's request for contingency capital
plans sheds light on a possible spin-off of Merrill Lynch.
Bank of America CEO Brian Moynihan
According to a Wall Street Journal report citing unnamed sources, the
Federal Reserve has requested contingency plans from Bank of America,
covering how the nation's largest bank holding company would navigate more
extreme economic uncertainty.
According to the report, the bank submitted several options to the Fed
including the more "theoretical" option of raising capital by issuing
tracking shares for the Merrill Lynch unit, which was acquired by Bank of
America on January 1, 2009, in an in exchange of common and preferred shares
, valued at $29.1 billion.
Bank of America declined to comment for this article, but mere mention of
issuing tracking shares on the Merrill unit's performance puts a spin-off on
the table.
FBR Capital Markets analyst Paul Miller says that Bank of America "has been
very good at telling people there's no way to spin it off, as there hasn't
been any sector analysis of Merrill Lynch" in Bank of America's financial
statements. "If they did any, Merrill themselves would want to be spun-off,"
Miller says, adding "if you're Merrill Lynch and you're making pretty good
money and all your profits are going to pay-off Angelo's mistakes, why would
you want to do that?"
Miller refers to Angelo Mozilo, the former CEO of Countrywide, which was
acquired by Bank of America in 2008, and which is the source of most of Bank
of America's mortgage pain.
Meanwhile, Richard Staite of Atlantic Equities makes a strong case that Bank
of America's path to compliance with enhanced Basel III capital
requirements will be much more difficult than CEO Brian Moynihan let on
earlier this year.
According to a report put out by Staite on Thursday, the analyst estimates
that Bank of America "will be $45 [billion] below proforma Basel III
requirements at end 2012." This estimate was reduced from a $50 billion
shortfall, following the company's decision to sell its international credit
card business, which the analyst says "could free up more capital than
initially expected." The estimate also factors-in the gain from the company'
s sale of half of its investment in China Construction Bank.
The recent $5 billion preferred stock investment by Warren Buffett's
Berkshire Hathaway (BRK.B_) won't boost Bank of America's Tier 1 capital
ratios, because the preferred shares feature a cumulative dividend. If
Berkshire were to exercise the 700,000 warrants that were granted as part of
its preferred investment, it would, of course, boost Bank of America's Tier
1 capital, but "given the warrants have a ten year life," Staite doesn't "
expect them to be exercised any time soon."