Its just a rumor, but WTF: Maybe Bank of America IS following part of our advice, spinning out Merrill Lynch in a sale. I assume this is a quasi-distressed sale, otherwise we’d see an IPO (but for market conditions).

Of course, a full blown pre-packged bankruptcy would be the better route. Remember, the bailouts were not about you or the economy or the financial system — it was all about rescuing big bond holders.

Here’s a reminder of our consistent advice going back to late 2008, most recently published  August 28:

Imagine: What if we’d gone Swedish on banks like Citi and BofA — nationalize ’em, clean ’em up, spin them back out to the markets by placing them into a prepackaged reorganization (a polite phrase for bankruptcy). Here’s how that might have played out:

First, the easy stuff: Fire senior management. Not just the chief executive. Nearly the entire top floor at the bank, including the board of directors, is canned. Equity shareholders are wiped out. Whatever is left after all is said and done goes to the bondholders, typically, at 25 to 50 cents on the dollar. (In Sweden, bondholders got 100 cents on the krona, but that currency was significantly devalued. So the bondholders were not made whole; they lost 50 to 75 percent in real value.)

Temporary nationalization is the play: Uncle Sam provides debtor-in-possession financing to keep operating. All of the bad holdings, mortgages, derivatives and other liabilities are pulled out and auctioned off. This includes the bad real estate (REOs), the CDS/CDO book, defaulted mortgage obligations. Remember, there are no such thing as toxic assets, only toxic prices. At some valuation, these are worthwhile investments — just not 100 cents on the dollar. Let healthy buyers pay 15 to 30 cents. And anything that is worthless gets written down to zero.

Recapitalize the parent bank, and spin off each division: IPO Merrill Lynch for $20 billion. Spin out a clean Countrywide for maybe $8 billion. Sell off all the non-depository bank pieces.

What you have left is a well-capitalized bank, owned by taxpayers, with well-capitalized divisions as stand-alone companies. All of the above have transparent balance sheets. Eventually, everything gets IPO’d back to the public markets. Uncle Sam gets repaid, and whatever is left (if anything) goes to the bondholders.

Any buyers for Countrywide . . . ?


UPDATE: September 8, 201

WSJ reports Mother Merrill Staying Put

Category: Bailouts, Corporate Management, M&A, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Long Overdue: BofA to Spin Out Merrill?”

  1. AHodge says:

    for the amount carried now on the BAC Balance sheet
    give it to angelo mozilo for amounts still owed him
    or amounts already paid

    always without exception favor pushing the rancid cooking back on the chefs
    then sort out the damage

  2. AHodge says:

    this is a splendid splendid article
    and the “only toxic prices” alone is priceless

  3. Jack Damn says:

    I simply can not hit the buy button fast enough!

  4. Moss says:

    ‘it was all about rescuing big bond holders’

    and protecting the compensation schemes of the parasites.

    Now after all is said and done; trillions wasted, billions paid out in bonuses to corrupt and incompetent executives, the pain is felt by the shareholders and taxpayers. It is time to end the financial hegemony of the banksters and in so doing choke off the political lobbying efforts.

  5. Smokefoot says:

    My only concern with this idea is the auctioning of the “toxic” assets – if this is not done carefully, the prices will be too low. Enough time and data needs to be given for people to analyze the various assets and figure out what they might be worth – and with the various complex structures this could take some time!

  6. AHodge says:

    $8 billion for countrywide
    is that a plus or a minus?

  7. nofoulsontheplayground says:

    Too bad Countrywide didn’t use a sock puppet in their ads. They’d be worth a lot more if they had that as an asset.

  8. louis says:

    God please make me a bond trader and turn back the clock to 1980.

  9. Sechel says:

    I seem to recall the WSJ story pointed to the creation of a Merrill tracking stock. I can’t see BAC agreeing to a whole sale Merrill spin-off which at this time is their crown jewel. Without Merrill they’re nothing but a bad bank residual.

    I do agree with your point that a true reorg would be more in our national interest even if it did create some short term pain. The bank could be capitalized via wiping out bond-holders and forced conversion of debt to equity which occurs in reorg.

    Not totally related, but had a number of conversations on mark to market. B.R. Do you think the banks would be more willing to modify bad loans if the loans were held at market price and not original cost?

  10. AHodge says:

    dear smokefoot
    as for “enough time” hasnt 4 years been enough?
    you are embarassing yourself trotting out these “Fire sale” type arguments and lack of faith in markets after all this time.
    dont you get Barry’s clarity?
    the only thing toxic
    is the too high prices carried on the assets compared to what they can sell for

  11. rktbrkr says:

    FHFA is suing ML for more than CW, how can BAC get a decent price in these conditions, they’re 2 pigs ina BAC poke, do they go into BK individually or all together?

    Whoever signs off on BAC better start getting religion soon

  12. constantnormal says:

    I think that, like a lot of homeowners, they are waiting for “market conditions to improve” … Good Luck with that.

  13. Lyle says:

    For BofA nationalize the subsidiary bank not the holding company. It is in better shape and the Countrywide mess is actually not in the bank but at the holding company level. The bank is Bank of America National Association of Charlotte NC, which by the date it was founded is actually the Bank of America bank of Ca. Let the holding company go belly up by having the FDIC sieze the bank, and let the holding company go Chap 11 as WAMU’s holding company did. The equity stockholders are already up to 90% down so there is little downside for them, give the debtors of the holding company a bath. The SEC would probably spin the Broker Dealer of Merrill Lynch off as well. (Not all of Merrill just Merrill Lynch Pierce Fenner and Smith the broker). The FDIC could do the bank easily and run it as the Federal deposit bank until it could be sold in pieces to others. Actually we should take the UK ring fence proposal a step further in the future holding companies should have 2 legal subsidiaries one for US business and one for outside the us.

  14. hsmith says:

    Trying to think this through. As much as I would personally love to see ML spun out of BofA, wouldn’t a spinoff of Merrill create a run on BofA deposits? Rough guess is that Merrill has somewhere on the order of $200B of deposits held at BofA NA and other BofA banks. Unless a contractural arrangement could be made to keep those deposits at BofA a Merrill spinout would seem to be quite painful. I welcome any thoughts.

  15. StatArb says:

    we already went Swedish … on FNM and FRE … and the bills keep coming in every quarter … $320 Billion so far , estimates of another $500 Billion

    …….. is this such a great thing

  16. DeDude says:


    FNM and FRE could become profitable in no time, by simply increasing their rates 100bp (they have no private sector competition in their market). Right now they function as an “off balance sheet” federal spending program to subsidize housing loans. Similar strategies would not work for nationalized banks because there would be no major unfulfilled loan needs at the bank level to put federal stealth subsidies into.

  17. klhoughton says:

    Sadly, it took less than six hours for this post to be outdated. Canning Krawcheck (who produced value for ML) and replacing her with Tom Montag. (who has spent time away from ML working the BofA side) pretty much ends the good idea.

    After fire-saling the Chinese venture, the Bernanke Put is the only thing keeping BofA alive. Again sadly, that’s probably enough.