Bank of America and Merrill Lynch's shotgun wedding left the bank with some very angry shareholders who are now being offered a $2.4 billion settlement.
Shareholders alleged that BofA’s management and board withheld information about massive losses at Merrill prior to the acquisition (they added up to over $15 billion in the fourth quarter of 2008). They said the bank allowed Merrill to pay nearly $6 billion in bonuses to its executives before the deal closed, and when the information came to light BofA's shares took a big hit.
A federal trial was scheduled to begin in October in New York but the proposed settlement, which has to be approved by a judge, helps clear up somewhat BofA's long list of legal battles stemming from the financial crisis.
“Resolving this litigation removes uncertainty and risk and is in the best interests of our shareholders,” said Chief Executive Officer Brian Moynihan. “As we work to put these long-standing issues behind us, our primary focus is on the future and serving our customers and clients.”
The bank said in a statement that it would take $1.6 billion hit related to the settlement, and overall third quarter earnings will be cut by 28 cents a share.
Moynihan and his bank have been slammed with legal battles stemming from the financial crisis. Early on during the crisis it appeared that the bank would be in decent shape to weather the storm but two issues in particular dragged the bank down: the acquisitions of Countrywide and Merrill Lynch.
Back then it was CEO Ken Lewis at the helm of BofA and who formed both the Countrywide and Merrill deals. Countrywide is arguably the worst acquisition in history leaving BofA with tens of billions in losses over bad mortgages. The Merrill deal has proven to be somewhat fruitful for the bank, however.
It's given BofA a steady stream of fee-income from its base of over 15,000 Merrill financial advisors. Those advisors who manage some $1.5 trillion in client assets are also able to sell the bank's own products (credit cards, mortgages, business loans) to their wealthy clients. The so-called cross-sell strategy wouldn't be possible without the wealth management arm.
Of course, it hasn't been an easy road for the BofA/Merrill marriage but compared with the Countrywide debacle Merrill looks to be a generous partner for the bank.
For now though, the problems at BofA are bigger than just Merrill and Countrywide. Moynihan, who was left to pick up the pieces when Ken Lewis retired at the end of 2009, has been hit with plenty of criticism as the bank's share price fell to $5 last year over concerns that it didn't have enough capital.
But Moynihan has managed to slowly but steadily get the bank on somewhat stable footing this year. His plan to boost capital levels by cutting billions in costs and selling non-core assets appear to be working. Shares of BofA are up 60% in 2012.
The bank reports third quarter earnings on October 17 where Moynihan will give an update on the bank's capital position.
Share of the bank are down 1% this morning.
