Bank of America, Merrill Lynch, and Salvaging the Financial Markets

Bank of America has had a tough time over the last few years.  Things arguably started in earnest when it acquired Merrill Lynch back in late 2008.  At the worst of the financial crisis, BofA went through with the acquisition despite the investment banking firm's hemorrhaging losses.  The acquisition engendered huge criticism, law suits by the SEC and NY Attorney General, and a shareholder class action.  Since then things have only gotten worse.  Law suits arising out of the mortgage business have proliferated and share prices are down. 

The NYT had a piece that to some degree revisited the Merrill Lynch acquisition, "Profits but No Joy for Merrill."  The article noted that the business at the investment bank was doing "surprisingly well" and that based upon fees is second only to JP Morgan.  In other words, it was a smart acquisition by BofA.  (This is the case despite the fact that the article states that "[i]n hindsight, many agree that Mr. Moynihan's predecessor, Kenneth D. Lewis paid too much for Merrill Lynch"). 

This piece requires a few observations.  Go back to the Fall of 2008.  The financial markets were in free fall.  Lehman shut down and the interbank market ceased to function.  Merrill Lynch was the next domino expected to fall.  In fact, as its current success shows, Merrill Lynch was not a sick company that needed to be disciplined by the market.  It was a healthy, strong investment bank that was weakened by unusual economic conditions that had not been seen since the Great Depression.  Merrill Lynch suffered from the loss of confidence that rippled through the financial markets and, unlike the commercial banks, it did not have the benefit of the Federal Reserve to bail it.  For anyone who thinks that the market is always right and government intervention is always wrong they should study these circumstances.

The second thing is that BofA was right to buy Merrill.  That seems clear now.  But its more than that.  Had Merrill not been purchased, Treasury probably would have allowed it to fail.  Had Merrill failed, along with Lehman, the depths of the financial crisis would have gotten exponentially worse.  However bad things were and however slow the recovery has been, they would have been far worse had a second investment bank collapesed.  As we noted on this Blog, the acquisition of Merrill presumably prevented its failure and presumably prevented a crises from getting far worse. 

In that regard, note the leadership that this acquisition took.  The easy thing to have done, given the growing losses at Merrill, would have been to back out.  Sure there would have been lawsuits and fallout.  But those are costs that can be managed.  Instead, the acquisition went through, the financial markets were saved a debilitating shock, and BofA got a profitable business that is today keeping it afloat.  Lewis was able to see the future in a way that, at the time of the acquisition, many could not and he was able to persevere despite enormous criticism. 

As BofA continues to suffer from low share prices and relentless law suits, it is worth keeping in mind that it probably did more than any other business to help the US recover from the financial crisis.