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Bank of America Comes Back for Seconds

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First it was Citigroup (NYSE: C  ) wanting more money. Now Bank of America (NYSE: BAC  ) is heading back to the bailout line for a second helping.

After biting off more than it could chew with its acquisition of Merrill Lynch (which closed less than two weeks ago), BofA has asked the Treasury for billions of dollars to help digest the fallen broker. This is on top of the $25 billion BofA received back in October, which supposedly included an extra dollop of cash for the then-pending Merrill acquisition.

None of this is very surprising. The only reason you haven't heard much about Merrill in the past few months is because BofA swarmed in and made an offer the same night Lehman Brothers filed for bankruptcy. That was just days before AIG (NYSE: AIG  ) was saved, and banks like Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) teetered on the brink of collapse. Had BofA not been there to save the day, odds are Merrill would have been sucked down the same drain Lehman was in short order.

What is pretty shocking -- appalling might be a better word -- is that BofA actually paid top-dollar for Merrill. The original offer called for BofA to pay $50 billion -- a sizable premium to book value at the time. It was an all-stock transaction, and shares tumbled shortly thereafter, so the final purchase price came out to around $33 billion.

Seeing how the deal was struck on the day Lehman Brothers collapsed -- quite possibly the worst day in Wall Street history to get a deal done -- few could figure out exactly why BofA was willing to pay such a premium. Odds are CEO Ken Lewis could have offered Merrill CEO John Thain a warm smile and a steak dinner and Thain would have accepted without hesitation.

But even with that top-dollar price, BofA still went back hat in hand-in-hand for more bailout money. Even worse, discussions with the Treasury to get more funds apparently began in mid-December -- before the Merrill deal closed. Why BofA didn't scrap the original offer, make a new offer for significantly less, and use the stock it had planned on issuing to pay Merrill shareholders to raise the cash needed to swallow the deal isn't clear -- and the fact that BofA didn't do so is pretty disturbing.

I've been supportive of bailing out the financial system simply because it's better (and cheaper) than the alternative, a Great Depression-style banking collapse. This, however, doesn't fit that mold. Merrill Lynch shareholders were paid $33 billion, a sum few analysts could rationalize, after BofA shook down taxpayers for the second time in three months.

Anyone else find that grossly indefensible? Feel free to share you thoughts in the comment section below.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Bank of America is a Motley Fool Income Investor recommendation. The Motley Fool is investors writing for investors.

Read/Post Comments (6) | Recommend This Article (16)

Comments from our Foolish Readers

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  • Report this Comment On January 15, 2009, at 3:13 PM, TMFCop wrote:

    Hey Morgan,

    This is pretty outrageous. I didn't support the original bailout or any of its iterations since, but this deal with BAC is beyond the pale.

    First, this wasn't a government-brokered deal. Ken Lewis voluntarily bought Merrill Lynch. Everyone thought Ken Lewis was nuts at the time he made the deal, and this pretty much underscores that assessment.

    What's even more nuts is that Paulson is making these backroom deals, and we're only finding out about it well after the fact. This isn't Paulson's personal piggy bank his raiding, it's the taxpayers money and we have every right to be aware of what's going on.

    Unfortunately, there was no way the original bailout, however well intentioned it might have been, was ever going to stick to the game plan and not grow. This is Washington after all, and we're talking about billions of dollars here. Once the toothpaste was out of the tube there was no pushing it back in. And now the flood gates have opened and there's just no stopping the exceses.

    Ken Lewis needs to be fired. He sought out this deal on his own; now the taxpayers are being extorted to bail him out. If he won't go on his own, the Washington needs to make him go. We're all shareholders now and should have a big say in what's happening.

    Funny, but not only did Lewis only recently say BAC didn't need no stinkin' bailout, but he was against Detroit getting one too. He said it was a form of "tough love" to save the industry. I guess his own moral hazard and integrity is okay so long as it's BAC getting the bailout. Anyone else can go pound salt.

    Argh! This stuff makes me crazy. Thanks for highlighting the scheming going on with BAC and Treasury to swindle us out of our tax dollars.


  • Report this Comment On January 15, 2009, at 5:44 PM, horsesense101 wrote:

    So bottom line, do we hold or jump ship?? I bought in at $38.50 so I'm down a whole bunch!! Help!!


  • Report this Comment On January 15, 2009, at 9:24 PM, closecover wrote:

    From what I understand, Bank of America said "we can't do this deal, we're walking away." Paulson and Bernake said, "you can't do that, its bad for the market." Then Bank of America stated, "O.K. make it worth our while." Which the U.S. government did. The anger should be directed at the U.S. government not Bank of America. Ken Lewis was prepared to walk away from the deal, so he shows at least some understanding of protecting the interest of BAC shareholders.

  • Report this Comment On January 15, 2009, at 10:17 PM, TMFDiogenes wrote:

    I've also been wondering for awhile why BAC paid so much for MER. Haven't been able to figure it out. Does anyone have any well thought out explanations?

  • Report this Comment On January 16, 2009, at 12:30 AM, starbucks4ever wrote:

    It just got an offer from Paulson that it couldn't refuse.

  • Report this Comment On January 16, 2009, at 7:23 AM, toraab wrote:

    why do they give bac more money to lose...?

    anyway, from i think that bac is going down...

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