Let's assume both assets have a nominal value of $36 bil. and deduct a 30% firesale discount. This brings us to $26 bil. Furthermore, we can expect further write-downs of $10-20 bil. If we take the middle, then we end up at the $11 bil. MER value. (I know that's a very simplistic approach, but I do not think a more sophisticated approach gets us a better number.) Well, BOA pays a nominal $50 bil., effectively it will be less – that's like 350% over the level they needed to pay.
And paying a premium on top of that? The management of BOA should stop making wrong assessments. With the purchase of Countrywide and others, they have already lost a lot of money. Now it's not even pathetic but pathologically dangerous to gather more obscure risky assets. JPM was smart, even the building was more worth plus the backstop of the FED, but the deal at that price makes no sense for the shareholders of BOA.
It makes a lot of sense for the FED and Treasury because MER would have been the next LEH within a brief time.
It's great for Temasek and Thain. He made a quick $200 mil. trade for himself. If the shareholders are happy in the end, which I doubt since they do not get cash, the 0.85 BOA shares in Q1 2009 might and will be worth far less. Finally, the proclaimed $50 bil. deal is just a hype on paper but, nevertheless, they could have bought it for $0.50 per share as well or even less. Who says the brokers are worth $26 bil.? It was obvious that MER shares would have been the next attack, so they might have halved within this week anyway.
The fact that Mr. Paulson does not want to expose $50 bil. of taxpayer's money is a purely sarcastic political argument (elections make that very unpopular). So instead, he urges BOA to risk $50 bil. of other people's money!
The bill for the taxpayers will come anyway in many ways. One will be that they loose a multiple amount of that this week in the markets. The total market capitalization of globally traded stocks in July 2008 was $51.2 tril. dollars, assuming an average drop of 3%, this gives us a loss of $1.5 tril. Plus, we have a $450 tril. in derivatives, bond markets and houses. Due to the collapse of LEH and AIG, UBS problems we will have a loss of $3+ tril. today.
In a bigger time frame, when the lower interest (negative) rates earn, combined with inflation due to this mess, it costs them far more and the amount equals probably 3-5 days in Iraq, which only brought higher oil prices.
This administration has strange priorities and, simply stated, does not speak the truth. In the most recent banking hearing, Bernanke and Paulson stated that they evaluated all of the big Wall Street houses and that they were monitoring them closely and no danger was in sight. How could they have missed the LEH situation? The FBI and Attorney General need to have a close look into the various statements and the diligence of the people involved (Bernanke, Paulson and their officers). LEH did not go broke due to liquidity, but due to looming losses they could not cover by equity and neither the CEO or CFO's of Lehman ever told the truth and mislead investors by publicly lying. But even worse the supervising authorities had a deep look into the balance sheets and did not take appropriate action and hence also mislead the public and investors.
There is no difference to ENRON, only that after Bear Stearns the supervising authorities had the chance to deal with it and stockowners did not. This is a case for legal class action and Mr. Fuld should lose every dime he ever made from LEH and be prosecuted along with the others involved.
Coming back to communism, the FED or Treasury must have dictated the terms of the MER deal. Why else offer such a premium, as they did for the Bear Stearns deal? Although the FED and Treasury denied it, various sources, including the CEO of JPM, said they were even prepared to pay more than $10/share but they were urged to go for an even a lower price. That is how it was done in Russia and China and they do it on the back of stockowner's money, which they have no right to do.