The nearly 100-year-old investment bank Merrill Lynch & Co. was bailed out on Sundayâ€“but not by the federal government. This bailout was brokered the way the market intends for failing firms to be handled in the wake of a crisis: by another firm in the free market. And technically it was a buyout.
Late Sunday night the boards of both Merrill Lynch and its new owner, Bank of America Corporation, approved a $50 billion sale. Merrill will continue its operations, only under new management, which is precisely what market order should demand of failing companies. This buyout provides an excellent example of what should be happening with Fannie Mae and Freddie Mac.
There are a lot of positives that come from this buyout. First, a financially solvent firm gets rewarded for making good investments during the financial market feast on subprime mortgages. Although BOA has had billions in losses from the housing bust triggered collapse of subprime lending, it had the capital to back up the losses and remains one of the healthiest major financial firms. Earlier this year BOA was able to acquire mortgage lender Countrywide Financial Corp. at blowout prices. They bought Merrill for less than half of what the investment bank's value was at its peak in 2007. Getting Merrill's large cadre of stockbrokers and investment bank assets, Bank of America has grown even larger, now involved in virtually every part of the financial sector.
Second, the historically successful, but recently mismanaged Merrill Lynch & Co., remains on the market. Bank of America will replace the leadership at Merrill who led it into ruin, but it can maintain the large number of quality personnel at Merrill who will continue to be able to provide services to the market. This is a win for everyone being served by Merrill and allows for the bulk of knowledge at the investment bank to be reharnessed faster than sending all their agents back out into the job market.
Third, this is a win for Wall Street, who has come under attack from all sides recently, for being inept at managing its resources. Keeping the federal government off their backs and working out a deal according to supply, demand, price signals, creative destruction, and all other free market economic principles gives the financial district a renewed sense of confidence.
Fourth, this comes as great news to taxpayersâ€“their money won't be used to cover for this set of corporate mistakes.
The BOA purchase of Merrill Lynch does not come without risk. Merrill has a large number of "problem assets" and billions more in write-offs coming. Bank of America has its work cut out for them in reshaping, absorbing, and relaunching Merrill Lynch, however it chooses to do. But Bank of America has a history of success and thus far has remained financial sound in the face of the financial storm. They have a great brand in Merrill, it simply a matter of using it right.