The woes of Bank of America Corp. (BAC) since the Merrill Lynch acquisition does not appear to fading anytime soon. On Dec 12, 2009, the Securities and Exchange Commission (SEC) announced its plans to cite Bank of America and some of its executives with additional charges for handling the Merrill acquisition inappropriately.
The SEC had initially charged the bank with a $33 billion charge on account of issuing misappropriate information regarding Merrill Lynch. Although the bank has claimed the charges to be no more than false allegations and even the court has given its judgment in the bank’s favor, Enforcement Director Robert Khuzami has now shown a keen interest in further investigation to establish the accusations against the company and its top officials.
Finally, acknowledging its own responsibility, Bank of America has agreed to pay an additional charge of $20 billion to cover Merrill’s losses. This came in last week when the company had already repaid its full $45 billion bailout money that was received from Trouble Asset relief Program (TARP), thereby completely freeing it from the pay restrictions. Peer group members such as Citibank Corp. (C) and Wells Fargo (WFC) are also seeking to repay their TARP funds.
In the backdrop, Bank of America acquired Merrill Lynch in Jan 2009 but since then the bank has been caught in a difference of opinion with regulators and lawmakers over Merrill’s 2008 bonus payments issues amid escalating losses. The bank remained silent when the information was obtained. It also kept telling investors that despite his doubts, the company’s CEO was asked to seal the transaction under pressure by the then Treasury Secretary and Fed Reserve Chairman.
We believe that with the acquisition of Merrill Lynch, Bank of America has gained a global-investment platform profitable retail brokerage addition and significant equity-underwriting capacity, all of which it lacked earlier. However, most of the benefits are expected to be reaped in the medium to longer term given the company’s current weak position. Alongside, the Merrill litigation issues may not only hamper results financially but it could also lower investors’ confidence.
Evidently, Bank of America’s third quarter results were abysmally worse than the Zacks Consensus Estimate, primarily due to the continued weakness in the overall economy as well as stress on consumers, resulting in high credit costs and loan losses. Although we also anticipate continued synergies from the company‘s large scale operation and balance sheet restructuring, overall, the adverse factors could take a toll on the company’s financial health in the near term. Thus, we recommend a Neutral stance on the stock.
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