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. ...