Despite the Bonus Fiasco, Maybe Merrill Was a Good Buy

Photographer:Alex Cid-Fuentes/Bloomberg News

After all the criticism, Bank of America may have tamed the Merrill Lynch bull after all.

Correction: An earlier version of this post referred to “Merrill’s purchase of Countrywide Financial Corp.” As the last sentence correctly said, it was Bank of America that bought Countrywide, before it bought Merrill Lynch.

Bank of America Corp. reported executive pay last week, and for the third year investment banking head and co-Chief Operating Officer Thomas K. Montag got paid more than his boss, CEO Brian T. Moynihan. Montag’s $14.5 million paycheck can be material for plenty of (justifiable) hand-wringing whether bankers are overpaid. Also worth thinking about, though, is what it says about Bank of America’s 2008 deal to buy Merrill Lynch & Co.

When that deal was announced, the markets hated it, slicing off $32 billion of Bank of America’s market cap, and things got worse from there. After the merger was done, Merrill promptly posted (surprise!) a $15 billion loss … and yet paid out $3.6 billion in bonuses. That’s the backstory. Now, three years later, Montag, who came from the Merrill side — he started there in 2008, after a career at Goldman Sachs & Co.– is the highest paid executive at Bank of America.

And you know what? That deal doesn’t look nearly so bad. Bloomberg’s Hugh Son wrote that Bank of America has “relied on Montag’s investment-banking operations to support the company while Moynihan dealt with struggling consumer units that handle mortgages and credit cards.” Some numbers from Bank of America’s last annual report underline this. For last year, Bank of America’s Global Banking, Global Markets and wealth management units — that is, the parts of the company that came mainly from Merrill Lynch — reported $9 billion in profits. Meanwhile, the rest of the bank reported $5.3 billion in profits from commercial banking, and a $6.5 billion loss from real estate. That last part is largely the unfortunate legacy of Bank of America’s purchase of Countrywide Financial Corp, maybe one of the great acts of corporate self-sabotage of all time.

In this context the Merrill purchase doesn’t seem so bad. When it was announced, the deal was worth roughly one-third of Bank of America’s market cap. Now the Merrill side appears to provide the bulk of its profits. Certainly if Bank of America had waited for a fire sale, it would have gotten Merrill at a better price. But then we’re in the realm of hypotheticals, and who knows whether a deal could have gotten done then at all.

In retrospect it looks like Bank of America did get one of the world’s great banking franchises at an opportune time. That’s a lot better than can be said for the company’s other acquisitions. Bank of America chief Ken Lewis did buy Countrywide, once the country’s largest mortgage originator, in a fire sale — and his successor has been paying for it ever since.

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