Merrill Spin-off May Be Just What BofA Needs

Updated from 3:06 p.m. EDT

Bank of America (BAC Quote) can attribute much of the recent ill will from investors to its acquisition of Merrill Lynch. The credit default swaps market appears to indicate derivatives traders anticipate a simple, if radical solution: Spin it off.

It costs more to insure against a Merrill Lynch default than it does to insure against one by BofA, and that price gap has widened since early February, notes Dan Barrett, an analyst at Tradition Asiel Securities. Barrett speculates that the CDS market could be pricing in the possibility that Merrill would be spun out, leaving behind the safer, core banking business.

Though the controversial acquisition just closed four months ago, such a deal would make sense for several reasons.

First, it would allow Bank of America to raise money, which government regulators have determined it needs to do, according to several unconfirmed reports.

It would also allow BofA to get some value for its investment banking division before it sees further departures of talented executives. Though several Merrill executives, including former Merrill CEO John Thain and President Greg Fleming, have left since the deal closed, many still remain.

Embattled BofA CEO Ken Lewis and the rest of the BofA brain trust in Charlotte have always had an uneasy relationship with their New York-based investment bankers. Roughly a year before the Merrill acquisition, Lewis was widely quoted as saying, "I've had all the fun I can stand in investment banking at the moment." The reason he liked Merrill was for its "thundering herd" of retail brokers.