This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Five Bold 2010 Predictions for Financial Stocks

Stocks in this article: BAC C GS AIG

What if Bank of America Spins Off Merrill Lynch?

Imagine a Bank of America (BAC) that still profited from Merrill Lynch, but didn't have to deal with its headaches. If the company made the bold move to spin off its Merrill division next year, it could do just that.

According to several barometers, Bank of America has gotten financially stronger via the Merrill acquisition. Merrill's charging bulls provided 18% of Bank of America's revenue during the first nine months of 2009, and a whopping 34% of its profit. Bank of America also has a much broader client base and a more diverse revenue stream. It can build upon those gains by cross-selling retail products to Merrill customers, and vice versa.

However, the Merrill deal also came with some hefty costs, including Bank of America's CEO, Ken Lewis, who plans to retire at year-end following a string of investigations and litigation stemming from the transaction. It also came with $15.3 billion in Merrill losses, $20 billion in additional TARP funds that needed to be repaid with dilutive stock offerings, and untold legal costs and damage to the company's reputation.

Though Bank of America has now repaid taxpayers' $45 billion bailout investment with a sizable return, it has also lost its good standing with regulators, lawmakers and taxpayers. Investors who are suing the company aren't very happy either. Nor are the former Merrill employees who defected due to culture shock, or the ones who stayed, but continue to bristle at their new "Bank of America-Merrill Lynch" corporate logos.

There are strong arguments on both sides as to whether the benefits of the acquisition have outweighed the cost. But before the Merrill deal was discussed or announced, Bank of America shares were trading above $35. Lately they've struggled to stay above $15.

If Merrill were spun off into a separate entity, some of those problems wouldn't go away, and others might even get worse. But as the chorus of public criticism reached a fever pitch in early September, one analyst suggested it might be necessary.

"If the result of these entanglements is that Bank of America will be forced to divest itself of Merrill Lynch or that shareholders must pay hundreds of millions in fines then the courts will have meaningfully harmed all involved," wrote Rochdale Securities' Richard Bove.

Of course, that speculation was ahead of CEO Ken Lewis' retirement announcement on Sept. 30, and there are no indications from the bank itself that a Merrill divestiture is on the table. But if all the talk in Washington about some banks being "too big to fail" leads to action, Bank of America appears to be a prime candidate for a break-up.

On the bright side, Bank of America could reap some big short-term gains if a spin-off did happen. The company could also opt to retain a stake in the independent Merrill franchise -- similar to its large stake in BlackRock (BLK) -- thereby keeping exposure to some of the hardy profits it has enjoyed this year. Perhaps most importantly, it could go back to doing what it does best: Being America's biggest bank, without the notoriety of America's most controversial investment bank.

Written by Lauren Tara LaCapra in New York. See all our 2010 stock picks.

5 of 5

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs