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”

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.

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]

Yesterday, Lewis spent time at the annual meeting defending the Countrywide acquisition, and telling investors that both companies would be much more prudent with underwriting future mortgages.

BofA, So Good [NYP]

So much for the Bank of America securities players hoping to make it to the show. Their dreams ended today in the AAA club with Charlotte layoffs announced this morning. No word on severance, though employees are apparently being handed foam fingers as they’re escorted out of the building.

How much fucking up can Bank of America do? About $6.5 billion worth of fucking up, apparently, minus what they’ve already done. We’re no experts, but we can’t help thinking that number sounds high. Could they really screw things up that badly on investment banking and mortgage transactions alone? Dubious. They want to justify that 6.5, they’re going to have to start hauling ass, in and outside the office. We crunched some numbers (6.5 billion divided by 31,000) and found that it comes out to about 200,000 7-diamond dawn to dawn packages. It’s highly unlikely the relatively bland management at BoA will be able to blow through it all, but if they start working now, a sizable dent could be made. Mozilo has pledged to make up the difference.

Bank of America May Face $6.5 Billion Loss [CNBC]

Bank of America’s chief executive Ken Lewis received $4.25 million in cash and $4.25 million in restricted stock for his 2007 bonus, less than half of his $18.5 million target. Know who else got screwed? Eliot Spitzer’s hooker, Kristen/Ashley. The intrepid entrepreneur was supposed to receive one million dollars to appear in a “non-nude” magazine spread and a “nude-nude” video clip for Girls Gone Wild, plus the possibility of joining the GGW tour bus. Founder Joe Francis took the money off the table when staffers informed him that after watching a few of their favorite DVDs over and over and over again, it’d come to their attention that they already had K/A’s ass on tape, so there was no need to cough up the cash (“It’ll save me a million bucks,” Francis told The AP. “It’s kind of like finding a winning lottery ticket in the cushions of your couch”). Luckily, Hustler publisher Larry Flynt’s offer of a mill. to get naked still stands, and Lewis is reportedly in talks with Honcho to make up his gipped scratch.

Spitzer call girl already gone ‘Wild’ [Yahoo]
Bank of America Proxy Statement [SEC]

A recently laid off BoA analyst received the following message from her former employer. I don’t know if this sort of thing is common practice, and it’s unclear whether or not the note was serious or just an attempt to crack a joke in the midst of a tough situation (self-deprecating humor about how crappy your bonus are is always good), but let us just say, well-played, Ken Lewis. Made us laugh.

Dear Employee of Bank of America:

Based on your annual earnings, you may be eligible to receive the Earned Income Tax Credit (EITC) from the federal government. The EITC is a refundable federal income tax credit for low income working individuals and families. The EITC has no effect on certain welfare benefits. In most cases, the EITC payments will not be used to determine eligibility for Medicaid, supplemental security income, food stamps, low income housing or most temporary assistance for needy families payments….

Bank of America Personnel Center

From the e-mail bag:

“…equity sales received 20% of their expected commissions for 4q07,
everyone super-pissed and polishing CVs. Also, people with guarantees who were laid off received only $5k due to an out clause in the employment contracts.”

*Apparently a gaggle of conspiracy theorists take pains to label Bank of America “BoA” (rather than B of A) because of the reptilian connotation associated with the former. It seems there is even an official policy on the proper acronymizing of the winding, carnivorous, cold-blooded financial institution. I guess certain higher-ups at the Bank absolutely fly off the handle if you provoke them this way. Since we are endlessly amused by the idea that the senior management can be distracted from returning to profitability this way, won’t you join us in adding “BoA” to your iPhone auto-correct for “B of A” and “Bank of America”? (Right after you join us in shorting their stock.) K? K.

Is Bank of America’s acquisition of Countrywide in trouble? You wouldn’t think so if you’re looking at the spread between where the shares of the two companies are trading. The spread between the shares and the offering price has narrowed dramatically in the last few days, from a high of nearly 25% to the current 15% gap.

But today the Monaco-based hedge fund SRM Global Fund filed a 13D complaining that the merger plan does not deliver “sufficient value” to Countrywide shareholders. SRM has acquired a 5.19% stake in Countrywide.

Most commentary on the deal has focused on whether Bank of America might back out. It has been described as a “bailout” and Bank of America’s role as that of a “White Knight.” The idea that Countrywide’s shareholders would balk at the deal comes as a surprise.

SRM seems to specialize in troubled home lenders. They also have a major stake in Northern Rock.

SRM 13D [SEC]
Countrywide merger criticized, BoA names mortgage exec [Reuters]

Layoffs have begun to hit Bank of America. On yesterday’s earnings call, Bank of America’s chief financial officer said that the bank is planning layoffs in its corporate and investment-banking unit. Now we are hearing reports from a variety of sources that the layoffs are underway.

Last week, Bank of America announced it would cut 650 new job reductions. The bank has been conducting a strategic review and reportedly concluded that it should largely exit the investment banking business. The banks has announced 3,650 layoffs since October but more are expected.

On yesterday’s call, CFO Joe Price said units that have been particularly hard hit by the credit crunch would see further layoffs. The capital markets and advisory group was named specifically.

“The headcount reductions will include the 650 front-office associates we announced last week, and there will be infrastructure reductions to come as well,” Price said.

Got the inside scoop? Send more details to tips@dealbreaker.com or leave a comment below.

Merger arbitrageurs were widely expected to be even more concerned about Bank of America’s plan to buy Countrywide Financial yesterday but, surprisingly, they seem to have become more confident. In early morning trading yesterday, Bank of America stock slid 6 percent and Countrywide fell 12 percent. As both stocks hit their lows for the day shortly after 10 am Tuesday morning, the spread between the share prices of the two companies and acquisition price they agreed to more than a week ago grew to its widest level since the deal was announced on January 11th. But as the day wore on, shares of Countrywide climbed back for a gain of 7.86 percent and Bank of America climbed 4 percent, the share prices and the agreed acquisition price narrowed a bit.

We’ve been talking to our sources at Bank of America (a rapidly dwindling pool of investment bankers who have begun to carry their resumes with them at all times), trying to figure out what the business rationale for buying Countrywide might be. The best answer we’ve heard is that the deal reduces Countrywide’s cost of funding. As a stand alone entity, Countrywide’s borrowing costs had grown so high that it was going to be teetering on the verge of insolvency. But as a part of the ginormous BofA, it will be able to greatly reduce those costs to the extent that its business can be very profitable even in the short term.

Felix Salmon over at Portfolio talks to the sources inside his head and comes to a very different conclusion. Salmon thinks it is about Lewis’s plan to concentrate on retail banking and get out of investment banking. “Bank of America has now, overnight, become by far the biggest and strongest and most important operator in the world of US mortgages. Over the long term, that status is going to be hugely valuable for Lewis, even if he has to take some write-downs along the way,” he writes. “Finally, the Countrywide acquisition solidifies BofA’s status as a consumer bank, and helps Lewis’s decision to move slowly out of the investment-banking business look strategic.”

Our political friends are already crying bailout. They expect there to be some sort of liability limiting move from Washington, DC as part of this deal. The conspiratorial minded set also believe that this confirms that Countrywide really was as close to bankruptcy as many thought yesterday.

But we first learned of this deal from our commenters, who tend to be our best sources for scoops and analysis. So don’t let us tell you what to think on this. Let’s do it the other way. Tell us what’s going on. Why is BofA so hot to buy Countrywide? And would you buy Countrywide if you were Ken Lewis?

Update:Herb Greenberg says the Fed is engineering this deal and that the government will likely provide Bank of America with guarantees limiting the losses. He also quotes Jon Najarian of Optionsmonster.com, on the very, very suspicious options activity prior to the news of this deal breaking.

To say there was HUGE unusual activity in Countrywide Financial ahead of today’s news that Bank America was close to finalizing a deal to buy the troubled mortgage giant would be as surprising as seeing Dennis Kucinich end his presidential run! We show over 304,000 calls traded against 248,000 puts, but the interesting thing here is that the bulk, some 76 percent of these calls were bought before the announcement! To us this means the likelihood of someone being tipped off was quite high. Like Burj Dubai Tower high!

Why BofA Bought Countrywide [Market Movers]

Citadel is often described as an investment bank masquerading as a hedge fund. And it looks like it may be moving even further in the direction of becoming a full-fledged investment bank. This morning Roddy Boyd and Zach Kouwe report for the New York Post that Citadel is in talks to buy Bank of America’s prime brokerage business.

It’s not surprise that Bank of America wants to get out of its investment banking business. Ken Lewis made that clear earlier this year, and BofA has been shedding senior bankers ever since. According to the Post, both the head of the prime brokerage unit and the head of its fixed-income business have recently left.

But would hedge funds be comfortable putting their trades through with CItadel on the other end of the line? There is already resentment about the way some prime brokers take positions conflicting with those of their clients. JP Morgan has been sued by Amaranth over such conflicts and there are perennial complaints about Goldman Sachs. Still, both JP Morgan and Goldman make good coin with their prime brokerage business, so the talk about conflicts hasn’t hurt them.

Still, there a plenty of folks who are suspicious of anything those boys with the white boards over at Citadel do. They have proven eerily apt at turning positions that ruin competitors into money makers. One hedge fund manager we spoke with this morning laughed out loud when we asked if he would run his trades through Citadel.

“Then again, they seem to know my positions and strategy anyway. So why not? Maybe they’ll accidentally tip me off,” he said.

Citadel, BofA In Brokerage Sale Talks [New York Post]

A quick follow-up to this morning’s story about the Columbia asset management fund. It is saying that it is closing its enhanced, private-placement money-market fund but that investors are being offered the option of cash redemptions or of switching their assets into other Columbia-managed funds. Because what are the odds that two funds would go down at the same place?

Bank of America says closing money market fund [Reuters]

CNBC online editor Charlie Gasparino is reporting that his sources tell him that that Bank of American has frozen a money market fund tailored towards institutional investors.

The fund is called the Colombia Strategic Cash Portfolio. Apparently Bank of America has sent a letter to investors notifying them that the fund will no longer take subscriptions or redemptions. The fund is invested in debt securities that are caught up in the crunch. He says Bank of America has not yet confirmed the story.

Update: And now they have. Gasparino says Bank of America confirms the story of the fund freeze. Anyone know who has money caught up in this fund?

Update: Both CNBC and our commenters report that it’s not a straight money-market fund but a fund intended to achieve money-market type results. It’s heavily invested in SIV paper, we’re told. Where’s that MLEC thing when you need it?