Weekend Merger Struck With Bank of America

By Binyamin Appelbaum and Zachary A. Goldfarb
Washington Post Staff Writers
Monday, September 15, 2008

Bank of America struck a $50 billion deal yesterday to buy Merrill Lynch, a merger that will unite the nation's largest consumer bank with one of its most celebrated investment banking firms, according to sources familiar with the negotiations.

Both boards approved the deal and it was being reviewed by lawyers late last night, the sources said. Bank of America will pay about $29 for each share of Merrill Lynch stock, which closed at $17.05 on Friday. A formal announcement is expected this morning.

The acquisition came at the end of a historic weekend in New York. Senior federal officials and Wall Street executives cloistered themselves at the Federal Reserve Bank of New York and urgently discussed how to minimize the damage to global financial markets from the looming bankruptcy of investment bank Lehman Brothers.

Merrill Lynch's chief executive, John Thain, had been among the Wall Street chieftains who had been summoned to the extraordinary session to help fashion a rescue for Lehman. But as the weekend went on, it became increasingly clear that Merrill Lynch could be badly injured by a Lehman bankruptcy and needed to find its own way to ride out the gathering storm.

Initially, Bank of America had been a leading suitor for Lehman, but backed out after federal regulators refused to put government money behind the deal.

Merrill Lynch is in better shape financially than Lehman, and Bank of America views the company as a better fit.

Merrill Lynch's crown jewel is the nation's largest retail brokerage. Bank of America views that business as a good addition to its own consumer financial businesses. The company already was the nation's largest retail bank, credit card company and mortgage lender. Now it will become the nation's largest retail brokerage, too.

Arguably no other American company sits closer to the heart of the consumer economy.

For Bank of America, which is based in Charlotte, Merrill Lynch also offers the prestige of owning one of the nation's great investment banks. Bank of America has struggled to build its own operation. Chief executive Ken Lewis declared last fall that he had "all the fun I can stand," as he announced that the company would slow its efforts to grow its own investment bank.

It now appears the firm never relinquished the underlying ambition, and Bank of America will now be a major player on Wall Street.

Bank of America is in a position to buy Merrill Lynch because until now the company has been a bit player on Wall Street. Instead it has set its sights on consumers, running the nation's largest retail bank, a business that remains highly profitable. That gave it the cash to go shopping for an investment bank, continuing a long tradition of opportunistic acquisitions.

Merrill Lynch was one of the largest producers and sellers of complex securities at the heart of the economic crisis. Merrill Lynch sold collateralized debt obligations, which are securities that package a large number of mortgage bonds and other debt, to investors around the world.

But Merrill and other Wall Street banks created many more of these complex securities than they could sell. As mortgage defaults started to rise, the value of the CDOs plummeted, forcing Merrill to write down their value. The mounting losses threatened Merrill's survival.

Merrill's shares dropped 36 percent last week, reducing its market value by $15 billion, to $26 billion.

Bank of America was one of the few bidders to show up at what turned out to be a historic fire sale. The company initially sought direct government support if it were to buy Lehman, but instead chose to buy Merrill Lynch. Sources familiar with the company's thinking compared the choice to fighting a fire. Executives felt that Merrill Lynch could be saved, but Lehman was lost already.

Bank of America, by contrast, remains relatively strong because its core banking business is healthy.

During the marathon New York meetings, federal regulators also assisted another one of the nation's biggest financial institutions, American International Group, the largest insurer in the country. AIG had too been battered by the mortgage meltdown.

Leaders of AIG were scrambling to pull together a sweeping restructuring plan to save their firm, said sources who spoke on condition of anonymity because of the fluid nature of the unfolding events.

The plan is likely going to include selling subsidiaries to raise cash, according to sources familiar with the restructuring.

AIG sells a type of insurance known as credit default swaps to cover losses on investments in certain kinds of securities. AIG made a big business of selling these swaps to cover losses in securities backed by mortgages.

As the mortgage market has melted down, AIG has been on the line to cover more of the losses, eating away at the firm's capital. Over the past nine months, AIG has posted $18.5 billion in losses.

Last week, its shares fell sharply on fears that it would have to raise tens of billions of dollars more capital to offset losses. The company's shares fell 31 percent alone on Friday.

After the market closed Friday, Standard & Poor's warned that it might lower its ratings on AIG's debt. S&P ratings are used by investors around the world to judge the safety of certain kinds of debt.

Lowering the rating would probably force AIG to pay more for loans and could force the company to come up with more collateral to back some of its complex insurance policies.

Staff writer David Cho contributed to this report.

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