BofA, Merrill Lynch and the Financial Crisis of 2008

BofA settled the law suit over the Merrill Lynch acquisition for $2.43 billion (along with some governance changes). See Bank of America Settles Suit Over Merrill for $2.43 Billion. The suit arose out of allegations that BofA did not adequately disclose a forecast of the fourth-quarter losses expected to be incurred by Merrill.  The action was described as “the largest securities class-action lawsuit settlement yet to arise from the financial crisis.” 

We have no comment on the merits of the case.  We note only this.  The acquisition of Merrill came at a critical time. Lehman had collapsed. The financial markets were hardly functioning. As evidence of the burgeoning losses at Merrill became clear, BofA had an argument that it could walk away from the acquisition (based upon a material adverse condition). There is some evidence that the government pressured BofA to complete the acquisition. Had the Bank walked away and had Merrill collapsed, the blow to the financial markets likely would have been enormous, potentially making the downward economic spiral substantially worse. 

This is one of those instances where the merits of the acquisition to shareholders can be debated (although as the Dealbook article notes, Merrill has contributed “roughly half the bank’s revenue since 2009”). But the financial system, the country, and the persons who would have suffered had the recession worsened as a result of a failure of Merrill, likely owe a debt of gratitude to BofA for completing the acquisition. 

J Robert Brown Jr.