Von Aldo
bull lying down

BofA Shareholders Were Shocked, Shocked That Merrill Was Losing Billions During Its Acquisition

bull lying downI don't know the minute details of the class action lawsuit against BoA (Ticker: BAC) for allegedly hiding what would become a $15.3bn loss in its acquisition of troubled Merrill Lynch back in September of 2008. But I think the class action lawsuit, a boon for the tort bar, is a bunch of bull. After all, ML was writing down tens-of-billions of dollars in 2008. So much so that even little ole me, just a dummy journalist, wrote an article that appeared in our magazine on Sept. 1, 2008 arguing that ML was in the midst of a near-death experience and that "it wasn't over."

If you read my editor's note back then, I was baffled by the billions being written off by ML that year. What did it mean? I found the write-offs to be abstract. How to put the write-offs in terms a person could understand? How much wealth was destroyed? Here is what I wrote:

"In trying to fathom the amount of capital that financial firms have destroyed since last summer, I called an acquaintance who used to work at Merrill Lynch. I was trying to get my brain around the big numbers, put the losses into context. Through the second quarter, Merrill wrote down about $50 billion in the credit crisis. That sum wiped out about 4.5 years of the company's earnings (not including the three-straight quarterly losses) — or 86 percent of its book value.

“'So, when you think about it,' I said to my friend, 'Merrill Lynch basically went bankrupt and recapitalized itself all at the same time — it's just that Merrill did so without having to file Chapter 11.'” My Merrill source agreed.

And yet the class action lawyers, who stand to make a ka-jillion dollars on the suit against BoA for securities fraud, are arguing that the poor-ole shareholders couldn't understand, weren't told about the losses? Sure the losses grew, but was that really a surprise? Even I figured out through ML SEC documents that it was in trouble and the trouble was only growing. It's simple arithmetic.

One thing I detest is supposively sophisticated investors who make bad bets and lose tons of dosh claiming, "We were mislead. We were lied to!" The fact is, market prices move. ML had been writing down bad mortgages for some time before the deal was announced on Sept. 18. (Indeed, the deal, in my view, amounts to BoA bailing out ML, which would have died, instead of taxpayers. Yes, it paid too much, but then pressure from the Treasury was exerted upon BoA to do the deal.)

The Ohio Public Employees Retirement System and "a Netherlands pension plan that is the second largest in Europe," says the Times, claim that they only learned of the mounting mortgage losses "in early November 2008, months before the deal closed."

The lawsuit is wending its way through the Federal District Court in Manhattan and a trial date is expected in October 2012, according to the New York Times' article this morning on the subject.

Please read my article on Sept. 1, 2008. Any idiot could have seen that ML was headed for death and the shareholders should have known that the mortgage mess was only growing and that ML's liabilities could not be accurately quantified. And besides, BoA's Merrill unit is about the only bright spot of all the banks' various units this year.

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