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That sound is the Blundering Herd running for shelter. John Thain’s decision to sell Merrill Lynch to Bank of America in a $50bn deal hastily concocted in the antechambers of the New York Federal Reserve underscores the gravity of Wall Street’s crisis. This was not the glorious outcome Mr Thain envisaged when he was parachuted into the job in November, but it is no humiliation. He has shown an outsider’s ability to adapt deftly to a fast-changing environment, not hesitating to hand over one of Wall Street’s most venerated banking franchises to a deal machine that is the product of four decades of acquisitions.
Even if Merrill is being taken out at a third of its 52-week high, it is, in the circumstances, hardly a steal at 1.8 times tangible book value and 12 times 2009 earnings. Mr Thain’s willingness to accept market realities has enabled Merrill shareholders to escape a total wipe-out. As Jamie Dimon noted after acquiring Bear Stearns, there is a difference between buying a house and buying a house that’s on fire. While flames are licking at Merrill’s outhouses, Mr Thain has persuaded BofA’s Ken Lewis there is still plenty of time to douse them. But until Mr Lewis can prove that Merrill has suffered only cosmetic damage, he will struggle to get investors excited about promised savings worth $7bn or 10 per cent of the cost base. BoA’s shares fell 15 per cent, destroying $23bn of value.
If the deal proceeds to plan, BofA would secure the Merrill brand and the largest retail broker network in the US, with a 17,000-strong herd of financial advisers as well as a leading investment bank and wealth management franchise. There are, though, two big dangers. First, much of the risk Merrill has “offloaded” in its vendor-financed sale of toxic securities could come back to haunt its new owner. Second, a culture war between two workforces remunerated accorded to different pay systems seems unavoidable. At a time when Lehman bankers are flooding the market with resumés, only the prime steers will dare stray from the herd for now. But when the flames die down, many others could follow.
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