Merrill Lynch Turns Into a Black Hole for Bank of America

With BofA's equity now too low to meet regulatory standards, Treasury is preparing another $10 billion capital infusion. BAC shares fell 18%

By Dean Foust

One deal too many. That could be the epitaph of many CEOs—Jerry Levin of Time Warner (TWX) and Ken Thompson of Wachovia (WFC) come to mind—who built their companies through ever-bigger mergers and then watched those crowning acquisitions become their downfall. Now the question is: Will Merrill Lynch come to represent Bank of America (BAC) CEO Ken Lewis' Waterloo as well?

That question suddenly isn't out of the realm of possibilities following news that the Treasury Dept. is close to committing billions more in financial assistance to Bank of America, which was said to be stunned by Merrill's unexpectedly large losses in the fourth quarter. According to reports, Bank of America—which has already received $25 billion in taxpayer funds—privately warned Treasury in mid-December that it might walk away from the Merrill deal before shareholders voted, amid concerns that Merrill was becoming a financial black hole. Now comes news that Treasury is preparing BofA with another $10 billion in capital, fearing that if the deal unraveled it could trigger another panic on Wall Street. The move did create panic among Bank of America's long-suffering shareholders, who bid its stock down another 18.4% in trading on Jan. 15.

For the 61-year-old Lewis, the Merrill Lynch deal wasn't one he had to have. Thanks to Lewis' past deals for MBNA, U.S. Trust, and Countrywide Financial, Charlotte (N.C.)-based BofA had built an impressive banking franchise with leading positions in checking accounts, credit cards, and mortgages. But there was a certain poetic justice in acquiring Merrill Lynch, given that New York banks had long derisively viewed their North Carolina rival as the financial equivalent of a dinner theater troupe that didn't have the talent to play Broadway.

Dividend in Jeopardy

While Lewis couldn't resist the opportunity to acquire Merrill Lynch's massive brokerage force—the legendary Thundering Herd of Wall Street—the question is whether Lewis will get to enjoy the fruits of the deal before he retires, or worst case, were to be eased out by the board. Already, some shareholders are grumbling that Lewis' deals for Countrywide and Merrill were poorly timed and may be cases of good money chasing bad.

After a 66% drop in its stock price last year, BofA's shares are now down another 42% in January and are now trading at a new 52-week low of 8.15. Bank of America's directors have already cut the company's once-lush dividend in half, and Citi Investment Research (C) analyst Keith Horowitz issued a report earlier this week predicting further cuts ahead. Horowitz, who now believes BofA could lose $3.6 billion in the fourth quarter, is only modestly sanguine about 2009. Horowitz lowered his estimates for 2009 earnings to just 25¢ a share—making it unlikely that BofA could sustain the current quarterly payout of 32¢ a share at a time when it's already scratching for capital.

According to a report by Friedman Billings Ramsey (FBR) analyst Paul Miller, the bank's tangible common equity ratio is now around 3.2%—a little more than a third the level that regulators will demand in the future. Even with the Treasury infusion, that could necessitate an additional issue of stock, which would dilute existing shareholders even more.

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