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Sunday, September 14, 2008


bank of america takes out merrill; AIG begs fed for help

a deal has been reached, per the wsj.

Driven by Chief Executive Kenneth Lewis, Bank of America has already made dozens of acquisitions large and small, including the purchase of ailing mortgage lender Countrywide Financial Corp. earlier this year. In adding Merrill Lynch, it would control the nation's largest force of stock brokers as well as a well-regarded investment bank.

A combination would create a bank of vast reach, involved in nearly every nook and cranny of the financial system, from credit cards and auto loans to bond and stock underwriting, merger advice and wealth management.

It would also show how the credit crisis has created opportunities for financially sound buyers. At $44 billion, or roughly $29 a share, Merrill would be sold at about two-thirds of its value of one year ago, and half its all-time peak value of early 2007. Merrill shares changed hands at $17.05 each on Friday, after falling sharply in the wake of Lehman's looming demise.

informed opinion had merrill's core businesses valued nearer $40, but there are obviously serious issues in the marketplace that are rewarding capital -- and of course bernanke and paulson are arranging the marriage at gunpoint. the takeout price is nevertheless a huge premium on the $17 MER traded at friday.

"I think John Thain at Merrill is the ultimate realist," Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."

if he wasn't realistic, i suspect the revolver on the table during the fed's weekend meetings would make him so. indeed, as jim bianco relayed to yves smith, the need for a merrill deal is absolute.

It’s all about Merrill. They need to announce a deal with BAC before the open. If they do not, they plunge to $10 to $12 (from $17) on tomorrow’s open and no way does BAC pay $25 to $30. Then Merrill is at risk of blowing up and a crash becomes very possible.

meanwhile, AIG -- the world's largest insurer -- has gone hat in hand to the federal reserve bank looking for a loan. moral hazard is here to stay! no one in trouble will now hesitate, it seems, to squeal for their handout in the expectation of being placated by politicians in an election year.

the fed, of course, asked for this when it started handing out backstops in the bear stearns deal. granting a line to AIG would kick another leg out from the shabby mythology of american "free market" capitalism that the fed is with lehman and merrill trying to salvage. particularly so when the idea for AIG's executives is not to save the company but save their power over it, as the journal notes:

During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms because it would have effectively given them control of the company.....

When AIG's board rejected the capital infusion, the company's recently appointed chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help. The Fed usually deals with banks and brokers, and it wasn't clear what it could do...

for that reason, part of me doubts that the fed dare extend a hand. is that naive? probably. as yves smith says:

This is truly unbelievable. Even as little as a week ago, the idea that AIG, the world's biggest insurer, would go begging the Fed for help would have seemed daft. But that's now an element of the meltdown in progress.

And AIG is a major credit default swaps writer, bigger than Bear. If Bear could not be allowed to fail, AIG certainly can't come apart. But how can the Fed extend a lifeline to a party it doesn't regulate, or even have as a counterparty? The Primary Dealer Credit Facility was a clever move, but was not in place soon enough to save Bear. This is even more of a stretch, and on an even more pressured timetable.

does bailout nation have any real limits?

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