Alex’s Notes: And the massive derivative mess continues to unwind.

The US has pushed so much paper into the markets, and the Fed has used up pretty much all its credit, so the next shoe to drop will be the bond markets.

More bailouts = direct bond issuances by the Federal Reserve. Scary territory.

When that bubble pops, look out, because you aint seen nothin’ yet.

***

Bank of America Drops as Merrill May Need U.S. Aid
By David Mildenberg

Jan. 15 (Bloomberg) — Bank of America Corp., the biggest U.S. bank by assets, plunged as much as 28 percent in New York trading on concern the company needs more government aid to absorb losses from the acquisition of Merrill Lynch & Co.

The lender slid $2.26 to $7.94 at 10:52 a.m. in New York Stock Exchange composite trading. Bank of America told regulators in December it might abandon the takeover because of Merrill’s worse-than-expected results, and the bank is in talks to get more U.S. aid, said three people familiar with the matter.

The government insisted the Merrill deal proceed because its collapse would renew turmoil in the financial system, said the people, who declined to be identified because talks are private. Details may be disclosed on Jan. 20, when the Charlotte, North Carolina-based bank could post its first quarterly loss in 17 years after buying Merrill Lynch and home lender Countrywide Financial Corp.

“It suggests that the Merrill acquisition was more dangerous than they thought,” said Kevin Kruszenski, director of equity trading at Keybanc Capital Markets in Cleveland.

Speculation that more of the nation’s biggest banks will need another dose of federal money helped send Citigroup Inc. down as much as 26 percent, and Wells Fargo & Co. declined 13 percent. Bank of America’s shares declined 30 percent through yesterday since Chief Executive Officer Kenneth Lewis told employees on Jan. 6 that 2008 performance may miss company expectations.

Overreached?

“Even with help from the government, we think Bank of America’s tangible equity levels are low relative to peers and that it will need to cut its dividend and/or raise equity capital in the coming months,” Standard & Poor’s Corp. equity analyst Stuart Plesser said in a research note today. He rates the bank “sell.”

The combined company has already received infusions of $25 billion from the U.S. Treasury.

Lewis overreached by rescuing two money-losing companies in six months, including New York-based Merrill Lynch and Calabasas, California-based Countrywide, say analysts including Paul Miller of Friedman Billings Ramsey Inc. Since becoming CEO in 2001, Lewis has spent $129 billion on acquisitions, including regional lenders FleetBoston Financial Corp. and LaSalle Bank, credit-card issuer MBNA and investment manager U.S. Trust Co.

Bank of America on Sept. 15 agreed to buy Merrill Lynch, the world’s largest securities firm, after a weekend of negotiations between Lewis and Merrill CEO John Thain. The $19.4 billion transaction came as Lehman Brothers Holdings Inc. sank into bankruptcy, crippled by the frozen credit markets.

Focus on Merrill

“Bank of America has all kinds of problems with its acquisitions,” said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “They’ve been so acquisitive, they find themselves with very little in tangible equity.”

Discussions about U.S. aid started in mid-December and the bank completed the purchase Jan. 1, based on assurances of U.S. help, according to the people. The new aid package is designed to ensure the Merrill Lynch deal gets done, not to save Bank of America from collapse, one person said.

The Treasury may decide to absorb some losses on Merrill’s assets and cap the bank’s liability, with terms still being discussed, the people said.

Scott Silvestri, a spokesman for Bank of America, and Brookly McLaughlin, a Treasury spokeswoman, declined to comment.

Writedowns Coming

Merrill may have lost 50 cents a share in the fourth quarter, Credit Suisse analyst Susan Roth Katzke estimated last month, citing declines in real estate, leveraged loans and private equity.

In 2009, Bank of America is likely to write down about $6.7 billion of Merrill Lynch’s $36 billion in loans and securities backed mainly by commercial real estate, Citigroup Inc. analyst Keith Horowitz wrote in a Jan. 11 report. Revenue from investment banking and wealth management will decline this year by at least 20 percent, he estimated.

Making the Merrill acquisition pay off will prove difficult because the brokerage’s two key businesses, its investment bank and 16,850 financial advisers, promise to be less profitable in coming years, said Julian Mann, a vice president of First Pacific Advisors LLC in Los Angeles. “There’s going to be more traditional banking and less of the whiz-bang stuff,” he said.

Staying Power

The Merrill purchase followed Bank of America’s July acquisition of Countrywide, the largest U.S. home lender. That transaction is probably causing losses at Bank of America because of the declining value of U.S. home prices, Townsend said. Losses from Countrywide’s loans to delinquent borrowers may top $29 billion through 2011, Horowitz wrote in his report.

Bank of America has sufficient sources of capital and more than 10 percent of U.S. bank deposits, giving it staying power, said David Hendler, an analyst at CreditSights Inc., who has an “overweight” rating on the company. Lewis is cutting as many as 35,000 jobs to help achieve $7 billion in annual merger-related cost savings and he raised $2.8 billion by selling some shares in China Construction Bank.

A bank employee since 1969 and the third CEO to lead the company since 1973, Lewis retains his board’s confidence as he tries to integrate Merrill and Countrywide, says Larry Carroll, president of Carroll Financial Associates, a Charlotte investment firm that manages $1.3 billion.

“Of the big three U.S. banks, Bank of America has the best chance of surviving because their trading risk is so much smaller” than Citigroup or JPMorgan Chase & Co., said Christopher Whalen, co-founder of Institutional Risk Analytics, a Torrance, California financial-services research firm.

Original Article

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