Defending his controversial purchase of Countrywide Financial Corp. early this year, Bank of America Corp. Chief Executive Kenneth Lewis emphasized that the nation’s largest consumer bank would be No. 1 in three “anchor” financial products: deposits, credit and debit cards, and mortgages.
Make that four now.
Bank of America’s agreement late Sunday to acquire Merrill Lynch & Co., which has 16,700 financial advisers, would make it the largest retail brokerage in the country, an investment bank with global reach and a powerhouse in business banking.
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Bank of America, based in Charlotte, was to swap stock worth $29 a share for each share of New York-based Merrill Lynch, valuing Merrill at about $50 billion.
Merrill’s shares dived 36 percent last week, to end Friday at $17.05, a 12-year low. Its stock hit an all-time high in January 2007, when its market value was about $140 billion.
That was before the credit crisis set in but just after Ownit Mortgage Solutions of Agoura Hills, Calif., a subprime lender of which Merrill owned 20 percent, declared bankruptcy. That proved to be the opening act in the colossal fiasco that threatens the U.S. financial system.
It started out differently last week, when federal officials urged Bank of America to consider taking over Lehman Brothers Holdings Inc.
“We looked at Lehman very hard,” a source close to Lewis said. “And we finally told the government that for us to do it would require some [federal] assistance.
“The government said it couldn’t provide assistance this time, which we understood. And we said, ‘OK, we just can’t do it.’ But then this opportunity with Merrill Lynch came up.”
Implying that Bank of America and Merrill Lynch had seriously talked about a merger before, the source said BofA was “extremely familiar” with Merrill’s operations.
Bank of America, with $1.7 trillion in assets, is considered fundamentally healthy. But it also has seen its capital base strained by losses on mortgage securities and by the costs of acquiring Chicago’s La Salle Bank last year as well as No. 1 mortgage lender Countrywide, of Calabasas, Calif., this year.
For Lewis, the Merrill deal would give the banking titan a far larger presence in the wealth-management business. Merrill, under CEO John Thain, oversees $1.6 trillion in brokerage client assets. But BofA also would be taking on the risk of deeper losses in Merrill’s own portfolio of mortgage securities and other investments.
The merger marks another step in the development of U.S. megabanks similar to those that dominate Britain, Japan and other highly industrialized societies.
Such giant institutions had been discouraged in the United States since the Depression-era separation of commercial and investment banks.
But the deregulatory Financial Modernization Act of 1999 knocked down those barriers, and large institutions such as Citigroup Inc., Wachovia Corp. and JPMorgan Chase & Co. have expanded accordingly, along with Bank of America.