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Long Overdue: BofA to Spin Out Merrill?

Posted By Barry Ritholtz On September 6, 2011 @ 12:37 pm In Bailouts,Corporate Management,M&A,Really, really bad calls | Comments Disabled

Its just a rumor, but WTF: Maybe Bank of America IS following part of our advice [1], 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 [1]:

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 [2]


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2011/09/long-overdue-bofa-to-spin-out-merrill/

URLs in this post:

[1] part of our advice: http://www.washingtonpost.com/a-how-to-guide-for-fixing-americas-banks/2011/08/26/gIQAdbUijJ_story_1.html

[2] Mother Merrill Staying Put: http://online.wsj.com/article/SB10001424053111903285704576556651190651510.html

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