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Has Brian Moynihan Also Had All The Fun He Can Stand In Investment Banking?

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Probably not, no. The Wall Street Journal reports today that the Fed asked BofA what it would do, just hypothetically, if it got sued even more than it’s already been sued. You might expect “find forty more Warren Buffetts” but BofA has actually got a trickier trick up its sleeve:

Executives of the bank recently responded to the unusual request from the Federal Reserve with a list of options that includes the issuance of a separate class of shares tied to the performance of its Merrill Lynch securities unit, these people said. Bank of America purchased Merrill Lynch in 2009, and it has become the bank's most profitable division.

Chief Executive Brian Moynihan isn't expected to pull the trigger soon, if ever, on the creation of a so-called Merrill Lynch tracking stock. Such a move would raise money from investors but could be viewed as counter to Mr. Moynihan's strategy of knitting together the disparate parts of the franchise into a cohesive whole.

This seems like a pretty far-fetched, low-down-the-list option. The Journal points out that BofA probably wouldn’t get any valuation bump for Merrill by issuing a tracking stock, and that “If anything, a tracking stock would call into question whether the business is being fully integrated into BofA” and whether BofA is committed to holding on to it. Henry Blodget, on the other hand, thinks that selling tracking stock wouldn’t go far enough – that BofA could raise more cash, and please Merrill Lynch bankers who feel undervalued at a North Carolina commercial bank, by actually re-IPOing Merrill.

It’s hard to imagine investors getting all that excited about a Merrill tracker. The 2008 crisis proved that big bank stocks really can go to zero in a liquidity crunch, and the history of Merrill and the current state of BofA demonstrate that those crunches can come either from investment banking businesses (trading too many bad mortgages) or from traditional banking businesses (originating too many bad mortgages). A tracking stock issued on a Merrill Lynch not ring-fenced from BofA would have all the downside risk of Merrill and also the (currently scarier) downside risk of BofA – but would theoretically only give investors equity upside on Merrill. That sounds like a bad trade.

From a regulator’s point of view, though, splitting up BofA is kind of attractive – it’s a small victory for Glass-Steagallism and reducing the size of “too big to fail” institutions. So the Fed might well let BofA do that if it wanted to. There’s just zero evidence that it wants to – on BofA’s call with Fairholme last month, Moynihan left open the possibility of ring-fencing and bankrupting Countrywide, unlikely though that may be, but did not discuss a Merrill spin or sale. The tracking stock idea sounds like a way for BofA to appease the Fed, sound like it's thinking creatively about capital, and remind regulators that it has some profitable businesses that aren’t getting sued multiple times a day every day – all without actually suggesting to investors that a Merrill divestiture is likely.



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