Rather than invoking the “WTF” call, Bank of America Securities has announced that it is dropping coverage of AIG. Sayeth BoAS:
The situation at this stage is binary and dependent on more political will than analyzable facts. While we see the value of the insurance operations being well excess of the parents liabilities, solving the liquidity issues have now entered the political realm. If the company gets into liquidation or bankruptcy the value could be significantly less than estimated. We acknowledge that the government and Fed could come up with a financing and if the situation gets clarified and lends itself again to fundamental analysis we would reconsider picking up coverage at that stage.
Related: Merrill Downgrades Lehman From “Neutral” To “WTF”
Tags: Bank of America, Merrill Lynch
Last I checked, Bank of America’s offer was something like .8595 shares of BAC common for each share of Merrill Lynch common. Looking at BAC’s current $28.22 price, that sounds like a $24.25 per share offer.
MER has been slipping steadily since after-hours trading just after the announcement had it in the mid-20s. Implied volatility for at the money calls 30 days out is sitting just below 200% as well. With spreads and volatility like that, someone in a risk arbitrage shop is going to clean up. And someone is going to take it on the chin.
I wonder if that long, even slide on my MER chart is just thankful equity holders bleeding out into the risk-arb crowd though.
As we predicted last night, shares of Bank of America are falling today after it announced that it was acquiring Merrill Lynch. The stock is off around 15 percent this morning. Because the acquisition of Merrill is an all stock transaction, with Merrill shareholders receiving 0.8595 shares of Bank of America for each share of Merrill, the stock movements mean that the market is now pricing the shares of Merrill significantly below the $29 per share first announced. Bank of America is now paying $24.63 for a share of Merrill.
Merrill shares continue to trade at a discount from Bank of America’s, although you have to be cautious about reading too much into merger spreads in all stock deals. This could be a bet on further declines of bank of America stock, or a pricing of risk that the deal will not actually close. Alternatively, it could simply reflect the presence of speculative arbitrage in the market.
We’ve known for most of the day that Lehman Brother has been actively shopping itself in a desperate attempt to avoid catastrophe. Now names of potential buyers are starting to come in. The Wall Street Journal is reporting that Bank of America is in talks with Lehman.
Perhaps most interesting is the Journal’s reporting on who isn’t participating. Up until just a few minutes ago we were hearing rumors that HSBC could put in a bid over night, despite earlier denials from the bank. Now the Journal says no bid is expected from HSBC. Others who aren’t “expected to participate” include Goldman Sachs, France’s BNP Paribas, Germany’s Deutsche Bank, and Spain’s Banco Santander. Barclays is a maybe.
While Lehman is looking for buyers, the potential buyers are looking for Hank Paulson and Ben Bernanke. Pressure is mounting on the government to become involved, as the Journal story makes clear.
But potential buyers remain wary about plugging holes in Lehman’s balance sheet, and are increasingly looking to the U.S. government to help backstop future losses, according to people familiar with the talks.
A number of these buyers would “come out of the woodwork,” if the U.S. were to step in, said one person monitoring the process. It remains unclear whether the U.S. Treasury or Federal Reserve would take such steps, as was done when the government assisted J.P. Morgan Chase & Co. in its Bear Stearns takeover in March.
Any government involvement would likely require an under-market price for shareholders. When the Fed and Treasury helped JP Morgan Chase buy Bear Stearns, the price of the stock was reduced from around $30 a share to $2 a share. A similar haircut for Lehman from recent market prices could result in a take-under priced at less than a dollar.
Lehman Brothers in Sales Talks; B of A Seen As a Potential Suitor [Wall Street Journal]
Bank of America is apparently set to become the eighth bank to agree to buy auction rate securities it sold to customers. According to Reuters, Bank of America spokeswoman Shirley Norton, said BofA is “ready and willing to enter into an agreement that follows the same basic terms of previously announced settlements.”
They may be jumping the gun by making this statement however. New York Attorney General Andrew Cuomo scolded Merrill Lynch for assuming it had reached an adequate settlement with his office without first going through the bother of actually reaching an agreement. In response to word of BofA’s “settlement” Cuomo’s office seems to have scoffed.
“Our investigation into Bank of America is ongoing,” a spokesman for Cuomo’s office said.
So far Citigroup, Deutsche Bank, Goldman Sachs Group, JPMorgan Chase, Merrill Lynch, Morgan Stanley, UBS and Wachovia Corp have settled auction rate cases, agreeing to buy back something in the order of $50 billion of the securities. Two Credit Suisse brokers face civil and criminal fraud charges for selling auction rate securities.
Bank of America: Ready to settle on auction rates [Reuters]
Bank of America interns are apparently being paid by the hour this year (as they were last), though this time it’s based on a 65 hour week, up from last summer’s 40. Not sure if this is punishment for not being able to eat a measly four egg McMuffins in under fifty minutes, but the seasonal employees were informed of the additional fifteen after their arrival, and the monumental failure took place maybe only a couple days in, so it certainly seems plausible. The 65 hour week is for investment banking interns; those in capital markets start collecting overtime after 55.
Tags: Mo Rocca
Bank of America is trading up 4.5 percent and I’m pre-tay sure I know why. Why? I’ll tell you why: ’cause they just wrote down $2 billion? No. ‘Cause net income for the first quarter fell 77 percent to $1.21 billion? No. ‘Cause everyone’s so damn excited about owning Countrywide? No. (And yes.) No, people, Bank of America’s stay in the motherfucking hizzeyheous hotel can only be attributed to this, the Mo Rocca-hosted (and Ken Lewis shot and directed) videos the firm just rolled out, which tout things like online banking and mobile alerts as being ‘smoking’ and ‘sexy.’ Behold, as MoRo asks, “Did you ever imagine that banking could be this hot?” and “Imagine if we were making out and you could mobile bank at the same time” and “What would you say if I told you could could transfer funds naked and check balances from bed?” Now, I know that after watching the spots, you might be thinking, “Those were, completely objectively, absolutely fucking atrocious,” and more to the point, just plain dumb. But before you go and short the shit out of BAC, let me just say, as a BoA customer, I have often noted that there is no better feeling than being slammed by their infernal overdrafting charges over and over and over again. So…they might be on to something.
Fantasy Banking #1 – Free videos are just a click away
Mo Rocca On Banking [Bank of America]