Megabank gets bigger as BofA takes in Merrill

Defending his controversial purchase of Countrywide Financial Corp. early this year, Bank of America Corp. Chief Executive Kenneth D. Lewis emphasized that the nation’s largest consumer bank would now be No. 1 in three “anchor” financial products: deposits, credit and debit cards and mortgages.

Make that four now.

Bank of America’s agreement late Sunday to acquire Merrill Lynch & Co., which has 16,700 financial advisors across the country, would make it the largest retail brokerage in the country as well, not to mention an investment bank with global reach and a powerhouse in business banking.

“There’s just no other company in the world that will have this wide a range of capabilities,” said a person well-acquainted with BofA’s thinking who was not authorized to speak publicly because the deal, agreed to in principle late Sunday, had yet to be signed.

Bank of America, based in Charlotte, N.C., was to swap stock worth $29 a share for each share of New York-based Merrill Lynch, valuing Merrill at about $50 billion.

Merrill’s shares dived 36% last week, to end Friday at $17.05, a 12-year low. Its stock hit an all-time high in January 2007, when its market value was about $140 billion.

That was before the credit crisis set in but just after Ownit Mortgage Solutions of Agoura Hills, a subprime lender of which Merrill owned 20%, declared bankruptcy. That proved to be the opening act in the colossal fiasco that now threatens the U.S. financial system.

It started out differently last week, when federal officials urged Bank of America to consider taking over Lehman Bros. Holdings Inc., another august Wall Street firm reeling from losses on mortgage securities. But the government was unwilling to provide financial backing for that deal, as it had done when JPMorgan Chase & Co. took over Bear Stearns Cos. in an earlier government-arranged rescue, a source close to Lewis said.

“We looked at Lehman very hard,” this person said. “And we finally told the government that for us to do it would require some [federal] assistance. The government said it couldn’t provide assistance this time, which we understood. And we said, ‘OK, we just can’t do it.’ But then this opportunity with Merrill Lynch came up.”

Implying that Bank of America and Merrill Lynch had seriously talked about a merger before, the source said BofA was “extremely familiar” with Merrill’s operations. “The companies know each other very well.”

Bank of America, with $1.7 trillion in assets, is considered fundamentally healthy. But it also has seen its capital base strained by losses on mortgage securities and by the costs of acquiring Chicago’s La Salle Bank last year as well as No. 1 mortgage lender Countrywide, of Calabasas, this year.

For Lewis, the Merrill deal would give the banking titan a far larger presence in the wealth-management business. Merrill, under Chief Executive John Thain, oversees $1.6 trillion in brokerage client assets. But BofA also would be taking on the risk of deeper losses in Merrill’s own portfolio of mortgage securities and other investments.

The merger marks another step in the development of U.S. megabanks similar to those that dominate Britain, Japan and other highly industrialized societies. Such giant institutions had been discouraged in the United States since the Depression-era separation of commercial and investment banks.

But the deregulatory Financial Modernization Act of 1999 knocked down those barriers, and large institutions such as Citigroup Inc., Wachovia Corp. and JPMorgan Chase have expanded accordingly, along with Bank of America.

“The business model of a large, well-funded commercial bank with a strong retail brokerage -- like Citi’s Smith Barney and Wachovia -- is the winning model for large firms seeking a strong retail presence,” said Robert Ellis, senior vice president of wealth management at Celent, a Boston financial research firm.

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A BofA chronology

1998: BankAmerica Corp. in San Francisco merges with NationsBank Corp. The new company, Bank of America Corp., will be based in Charlotte, N.C.

2001: Kenneth Lewis takes over as Bank of America chief executive

2002: Bank of America agrees to pay $490 million to settle claims that it misled shareholders before its merger with NationsBank

2004: Bank of America buys FleetBoston Financial Corp. for $47 billion

2004: Bank of America and FleetBoston agree to pay $675 million in fines and restitution to settle charges that the banks let privileged investors engage in trading practices that hurt regular shareholders

2006: Bank of America buys MBNA Corp., the biggest independent credit card issuer, for $35 billion

August 2007: Amid rising concern about financial problems at Countrywide Financial Corp., Bank of America invests $2 billion in the lender

January 2008: Bank of America agrees to buy Countrywide, eventually paying $2.5 billion in stock

Sunday: Bank of America tentatively agrees to buy brokerage giant Merrill Lynch & Co. for $44 billion in stock

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Source: Times research by Scott J. Wilson