There are a lot of things in the financial industry that you could legitimately get upset about and so it seems sort of wasteful when people go around getting upset about the other things.1 Like: the too-big-to-fail banks have a lot of subsidiaries, which is bad for some reason. Complexity! Opacity! Subsidiaries. I dunno.2
Anyway one of the big ones is going away:
Bank of America Corp., the second-biggest U.S. lender, plans to merge its Merrill Lynch subsidiary into the parent company to reduce complexity and costs.
The move could happen as early as the fourth quarter and means Charlotte, North Carolina-based Bank of America assumes all the investment bank’s obligations and debt, Merrill Lynch said in an Aug. 2 filing. Dissolving the legal entity also ends Merrill Lynch’s need to file separate regulatory disclosures.
It's true! Here is the MER 10-Q, from two weeks ago, which says pretty much that. It's a little weird that no one noticed this for two weeks but from what I can tell Merrill, as an entity, has mainly nostalgia value. It has loads of bonds outstanding, most of them not guaranteed by Bank of America, but its credit is more or less exactly the same as Bank of America's.3
Which suggests that the stated reasons for the merger given in the 10Q are probably about right - "to streamline [BofA's] organizational structure and reduce complexity and costs," and I guess to stop writing these silly 10Qs. Any sort of sneaky credit arbitrage - e.g. the Zero Hedge theory that "Merrill's derivatives are finally going to get the backing of BofA's deposits" - is thrown into doubt by the fact that nothing's really changing about the credit.4 And there's no real change in branding - "The bank has said it plans to keep the Merrill Lynch brand, which it uses for its retail brokerage and investment bank," and I suspect that a lot of people who work for the investment bank have never been quite sure if they belong to Bank of America or Merrill Lynch or some other subsidiary.
Perhaps I'm missing something though? My general bias is that creating or collapsing boxes on an org chart usually doesn't have an enormous effect in the world, though it can have the sorts of reduce-complexity-and-filing-fees costs that we're talking about here. There are exceptions, obviously - bank subsidiaries of bank holding companies are rather more interesting than non-bank ones,5 and there can be tax and other effects that make a profusion of boxes interesting - and perhaps one of those applies here. I sort of hope so. Isn't there some symbolic sadness to ending the existence of a once-proud icon of etc. etc. just to, like, save on paperwork?
But actually, wait, Bank of America's probably not eliminating the once-proud icon at all! Yes, Merrill Lynch & Co. seems to be going the way of Shearson Lehman Hutton and Kuh, Loeb & Co., but you know who's gonna stick around? The gloriously named Merrill Lynch, Pierce, Fenner & Smith, Bank of America's broker-dealer entity, which is currently a Merill Lynch & Co. subsidiary but will presumably, in the new order, be owned directly by Bank of America. And which is hard to get rid of since BofA really does need a broker-dealer, though I suppose it could just go back to boring old Banc [sic] of America Securities if it was really bent on getting rid of Merrill.
But I suspect it's not. So Bank of America is getting rid of Merrill Lynch & Co. and bumping Merrill Lynch, Pierce, Fenner & Smith up to take its spot on the org chart. Fenner must be tap-dancing in his grave.6 It feels a little like a conservation law is at work here. Bank simplification isn't as easy as it might sound: you get rid of one subsidiary, and another one pops right up. With less debt, sure, and less paperwork, but on the other hand: with a longer name.
1.Really I just don't get how outraged people get about SEC settlements where companies don't admit guilt. Like: here is what is going to happen in the London Whale case:
- JPMorgan('s shareholders) are going to pay massive fines to every agency around.
- The people who cooked the Whale books are going to jail (if the FBI can find them!).
And here is what a settlement that admits guilt would add to that:
- JPMorgan's shareholders would also transfer massive amounts of cash to people who were JPMorgan shareholders a year ago and are not now.
Okay, super, that's obviously really important.
2.This isn't just casual/media observers either. That Journal article says:
Comptroller of the Currency Thomas Curry, whose agency oversees national banks, said in an interview that his staff intends to pay closer attention to "needless corporate complexity" and "whether it's time to start cutting some of the brush out."
I mean okay fine I'll grant you that probably some boxes exist on some org charts with the express purpose of bamboozling Thomas Curry.
3.Baa2/A-/A for each, with 5-year CDS looking like this:
From a Moody's March 2013 credit opinion:
ML&Co is a direct subsidiary of BAC and is the intermediate tier parent holding company over BAC's principal US broker/dealer subsidiary, Merrill Lynch, Pierce, Fenner & Smith (MLPF&S, unrated). BAC has not guaranteed or assumed any of the outstanding debt of ML&Co; nevertheless, the ratings for ML&Co (Baa2 senior) are the same as those for BAC, reflecting the strategic importance of Merrill Lynch to BAC as well as the significant financial linkages between them. ...
We assume this high level of support because BAC has a significant exposure to ML&Co including not only its equity investment in ML&Co (equal to 27% of BAC's total shareholder's equity) but also substantial intercompany funding and operating agreements, and because ML&Co's customers and counterparties are also significant counterparties, funders and depositors of other subsidiaries of BAC, notably Bank of America N.A.(BANA). We believe that if BAC did not support ML&Co it would create significant reputational damage for the bank itself, and would strongly increase the possibility of flight of Bank of America's institutional and wealth management clients across the firm.
4.Idle questions: if Merrill did trade much wider than BofA:
- Should BAC buy back a lot of MER debt (funded with new matched-maturity BAC debt) to capture the spread, before announcing the likely merger?
- How quickly would the market catch on to that?
- Would that be, y'know, Bad? (Insider trading, etc.?)
There's been some MER debt buyback here and there though seemingly none since 2Q2012, so I guess the answer to the second question is "fast."
5.Also broker/dealer subsidiaries, which we're getting to in a second. Also important are subsidiaries that are especially terrible, in ways that Merrill never aspired to, like oh say Countrywide.
6.Did you Google to check if he was dead? I did, and learned that Charles E. Fenner's firm was Fenner & Beane, which merged with Merrill Lynch in 1941; that his partner was Alpheus Crosby "Alph" Beane; that Jefferson Davis died in his house; and that he gave a eulogy of Robert E. Lee. Anyway he seems to have died 50 years ago. The real loser here is Alpheus C. Beane, who got bumped off the letterhead to make room for Smith. Smith! When I start my fake hedge fund I might call it Alpheus C. Beane & Co.