I have to admit, I thought Bank of America
After news of a $2.39 billion quarterly loss and the announcement that dividends are all but history, my hope is waning. Not because of the loss, but because investors now have sincere reasons to question the capability of CEO Ken Lewis.
B of A's recent Merrill Lynch acquisition necessitated another government bailout, which will drop an extra $20 billion into its coffers, plus a government guarantee of 90% of losses on a $118 billion pool of bad assets after B of A sucks up the first $10 billion -- similar to the bailout part deux that Citigroup
What's shady to me is that the B of A bailout is needed solely because of the two-week-old, $33 billion acquisition. CEO Ken Lewis apparently realized he bit off more than he could chew and debated renegotiating the deal last month, only to have the Treasury swarm in and beg otherwise, fearing that a failed deal might upend financial markets.
While havoc certainly would have ensued, B of A essentially sacrificed its own shareholders to save Merrill Lynch. As part of the bailout, quarterly dividends of more than a penny per share are banned for three years without government consent, leaving shareholders at a huge disadvantage compared to JPMorgan Chase
Make no mistake about what happened here: Lewis jumped the gun with Merrill Lynch, and shareholders are now paying dearly. On top of the $33 billion already paid for the broker, let's tack on the $4 billion in preferred stock (plus $320 million a year in associated dividends), $400 million in warrants, and lost income from having to ax common shareholder dividends. Ah, the gift that keeps on pillaging ...
Anyone else agree that it's time for Ken Lewis to go? Perhaps former Merrill Lynch CEO John Thain -- who was able to convince Lewis to pay such an ungodly amount -- could take over. His dealmaking skills look nothing short of brilliant at this point.
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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Motley Fool is investors writing for investors.