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Bank of America's Potential Merrill Conflict

Bank of America's biggest headache from the Merrill Lynch deal could come from interest conflicts between its investment banking and retail brokerage businesses, according to one observer.



) --

Bank of America


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acquisition of

Merrill Lynch

last year has drawn plenty of controversy already, but the brouhaha that cost CEO Ken Lewis his job may just be a warm up, according to a seasoned observer of the money management industry.

To date, the greatest controversy over Bank of America's acquisition of Merrill has stemmed from BofA's failure to tell shareholders about the extent of losses at Merrill until after they had approved the deal. There have also been questions about the cultural fit between the hard-driving New York-centric investment bankers and the name tag-wearing retail bankers in Charlotte that has caused some observers to refer to Bank of America as the


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of banking.

But Michael Lipper, writer, investment consultant and founder of the eponymous mutual fund ranking business, which he sold to


in 1998, says there is another issue on which Bank of America shareholders would do well to keep a close eye. That is the potential for Merrill's investment bankers to pressure its "thundering herd" of brokers into selling unsuitable investments to little old ladies.

"I don't think the senior bank people understand enough about the retail brokerage business," Lipper says. While synergies between the businesses of branch banking, retail brokerage and institutional equities underwriting may make perfect sense on paper, things often don't work out so well in practice.

"All you need is one or two issues to blow up and then the regulators and the press will crucify you," Lipper says.

Let's say, for example, that Bank of America has a loan to Company X sitting on its books that gets into trouble. One way to give the bank a better chance to recover the loan would be to sell equity in Company X to retail investors. Problems of this kind pop up all the time when retail brokerage units and investment banks gets together, Lipper says.

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A fresh example of the type of conflict Lipper cites occurred at


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, which

recently lost an arbitration claim

by one of its retail investors over Lehman Brothers-issued debt securities it had sold her. Many similar cases are said to be pending.

Though Merrill has already been managing the potential conflicts between its retail brokers and investment bankers for years, many managers have changed since Bank of America took over Merrill at the start of this year, from the CEO on down. Take the head of the investment bank, Tom Montag, who is ex-

Goldman Sachs

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. While Goldman has a money management business, its clients are wealthy and thus less likely to get a sympathetic hearing from the press, Lipper points out.

Bank of America is not the only place Lipper believes could face these issues next year. He says UBS, which is trying to turn around its retail brokerage business under former Merrill brokerage boss Bob McCann, remains vulnerable. He would not be surprised to see both of those firms end up spinning off or selling their brokerage units.

If they do, next in line would be

Morgan Stanley

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's Smith Barney unit, purchased from


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earlier this year. Lipper says Morgan Stanley has become pretty good at managing the brokerage investment banking conflict, having learned painful lessons from its 1997 merger with Dean Witter Reynolds. Still, if Bank of America and UBS end up exiting the retail brokerage business, Lipper says, Morgan Stanley could easily face pressure to follow suit.

Written by Dan Freed in New York.

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