Bank of America may need to consider selling Merrill Lynch.
The bank recently disclosed that expenses related to soured home loans could total $20.4 billion in the second quarter. The bank has racked up legal and settlement costs to resolve demands that it buy back soured mortgages sold into securitizations, many of which were originally made by Countrywide Financial, which the bank acquired in 2008.
The ongoing costs from Bank of America’s mortgage exposure are set to run headlong into the higher capital requirements global regulators want to see implemented. As a result, Bank of America may find that it is unable to keep the promise of its CEO to raise its dividend.
The stock is down 27 percent for the year, and the dividend is stuck at the crisis level of a single penny per share. Regulators have refused to permit Bank of America to increase its dividend until the bank’s capital position improves.
Pressure is building from outside investors and inside Bank of America for a dramatic change. There have been talks at high levels about the possibility of selling portions of the bank—including the Merrill Lynch business it acquired at the height of the financial crisis.
Nothing definitive has been decided, according to people inside the bank. No specific deal is even under consideration. Some insiders are skeptical the bank could find a buyer at an acceptable price.
Some have said the best bet might be to IPO Merrill as a separate public company, although this might be unlikely given recent market conditions and the performance of the financial sector.
But something must be done to repair the ongoing damage to Bank of America's shares. Could selling or spinning off Merrill do the trick?
Merrill Lynch had a market cap of $64 billion in 2007. Bank of America paid around $50 billion to acquire Merrill. While it’s clear that Merrill not worth anything like that today, it may be valued more highly outside of Bank of America than inside.
Morgan Stanley , which had a similar market cap of $68 billion in 2007, now has a market cap of around $32 billion. Selling Merrill might allow Bank of America to quickly accumulate capital to meet regulatory requirements and perhaps raise its dividend.
The bank also has a $21 billion stake in China Construction Bank Corp.
Reuters is reporting that three people briefed on the matter said the bank is “weighing” a sale of at least part of its stake.
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