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BankAm Revisited

July 31, 2012

Almost a year ago, when Warren Buffett consummated a transaction with BankAm Merrill Lynch, we had predicted that the deal will not pay off  for the great Buffett. (https://crediteye.wordpress.com/2011/08/26/wannren-buffetts-bankam-deal-will-not-pay-off/).  Warren Buffett’s deal was a long-term one- so it is too early to affirm whether the deal has succeeded or failed.  But with every passing day, we feel even more convinced that this will be one of the few big misses of the great investor (on par with his Conocco Phillips transaction in early 2008).

Bank of America Merrill Lynch is now trading at approximately 36% of book value.  There are four reasons for this.  Readers of this blog would be familiar with the first three reasons 1) illiquid assets (including derivatives) carried on the balance sheet at higher than values at which a willing buyer can be found 2) Inadequate loan loss reserves 3) Inadequate provisions for legal expenses and settlements from the mortgage crisis that will dog the bank for a few years to come. 

The fourth reason is dragging down of the value of the enterprise (we call them “negative NPV” units) by loss making units, that will continue to make losses for some more time to come.  Chief among the negative NPV units of Bank Am is Merrill Lynch.  Last quarter, the unit made a loss of $1.6 billion.  For the whole of 2011, Merrill Lynch had a loss of $1.7 billion.          

 

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