Please ensure Javascript is enabled for purposes of website accessibility

How Bank of America Came to Own Merrill Lynch

By Motley Fool Staff – May 13, 2016 at 4:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The backstory behind the nation’s second biggest bank by assets.

Analysts have begun to question whether Bank of America (BAC -1.50%) can continue to exist as it's currently constructed. Among other issues, its 2008 acquisition of Merrill Lynch has saddled Bank of America with higher regulatory and compliance burdens compared to smaller and simpler competitors such as Wells Fargo (NYSE: WFC).

In this segment of Industry Focus: Financials, The Motley Fool's Gaby Lapera and John Maxfield dig into the backstory that explains how Bank of America and Merrill Lynch came together in the first place.

A transcript follows the video.

This podcast was recorded on May 9, 2016. 

Gaby Lapera: We're going to be talking about Bank of America and Merrill Lynch. As many of you may have noticed, if you're a Bank of America customer, Merrill Lynch and Bank of America are in some way joined. I think Maxfield can give us a little more background on exactly how they came to be together.

John Maxfield: That's right. Bank of America purchased Merrill Lynch in September of 2008. To set the scene a little more, one of the things we've seen in the years since the financial crisis is that some banks have recovered, and even actually thrived as a result of the financial crisis. Wells Fargo is a perfect example of that. It's more than doubled in size, it's making more money than it's ever made, and even in this tough interest rate environment, Wells Fargo is such an incredibly vibrant and viable business model that you wouldn't even guess that it had just survived the financial crisis. JPMorgan Chase is doing pretty well, too. But Bank of America is really struggling. Mind you, this is the nation's second-largest bank. It's a really important bank of the United States. 

The question is, why is it struggling? And one of the reasons it seems to be struggling is because of the acquisition of Merrill Lynch that it did in September of 2008, in the trough of the financial crisis. It was over a very fast weekend, the same weekend that Lehman Brothers failed. The Treasury Department and the Federal Reserve approached Bank of America to see if they would be willing to basically just buy Merrill Lynch over the course of the weekend, and that's what they did. They paid something like $50 billion for Merrill Lynch.

But the thing that's important to keep in mind in all of this is, that happened before the post-crisis regulatory regime changed the name of the game for banks.

Lapera: Yeah, and I think what listeners have to understand, too, is that people were worried about a domino effect, just like they were worried about Vietnam and communists being a domino effect. People were worried about banks. So, Lehman Brothers failed, and then they were convinced that the banks, from smallest to largest, would fail one right after the another. That's why the federal government stepped in and asked Bank of America, "Hey, do you want to buy Merrill Lynch before it fails?"

Maxfield: That's right. If we go back in time to 2008, in March of that year is when the Treasury Department directly approached JPMorgan Chase to say, "Can you guys step in and save Bear Stearns?" Bear Stearns was the fifth largest investment bank. Lehman Brothers was the fourth largest, and Merrill Lynch was the third largest, then you had Morgan Stanley and Goldman Sachs. To Gaby's point, it looked like that was the way the dominoes were tumbling. You had Bear fall in March, you had Lehman fall in September. And the thought was, if you didn't draw the line somewhere, all five of them would go, and that would cause a global catastrophe.

Lapera: Do you think Merrill Lynch actually would have failed if Bank of America hadn't bought them up?

Maxfield: That's a great question. (laughs) Gaby, I have to be honest, that's an amazing question. Let me answer it this way -- there are some banks out there, JPMorgan Chase and Wells Fargo in particular, who basically said, "We don't need the federal government to step in to save us." And to a certain extent, that is right, because Wells Fargo and JPMorgan Chase had plenty of liquidity and plenty of capital. They were fine as institutions. It was really just a handful of other commercial banks that were struggling, then all the investment banks.

But had the government not stepped in and basically backstopped the entire credit market in the United States, every single bank was a threat of failure. JPMorgan Chase may have been fine, but all of its counterparties that owed JPMorgan Chase money ... when one counterparty owes another counterparty money, that's an asset to the company that the money is owed to. So basically, JPMorgan Chase's assets could have been decimated not because of JPMorgan Chase, but because of all its counterparties failing. 

So, the fact of the matter is, yes, I think there's an argument to be made that, if the government didn't step in, not only would have Merrill Lynch failed, but even the biggest and soundest financial organizations in the country would have been at threat of failure.

Gaby Lapera has no position in any stocks mentioned. John Maxfield owns shares of Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
$30.20 (-1.50%) $0.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.