Bank of America's bid for Merrill Lynch is the second major pairing this year of a commercial bank and an investment bank, on the heels of the marriage between JPMorgan Chase and Bear Stearns. That's raising questions about whether such matchmaking is in the works for other banks, including Charlotte rival Wachovia.
But Wachovia's chief executive, Bob Steel, said Monday that Wachovia has “a great future as an independent company.” And like Merrill, his bank already has a big force of stock brokers, he pointed out.
Bank of America CEO “Ken Lewis … talked about how attractive the independent financial adviser model is,” Steel said in a TV interview. “We've (already) got it … and now Bank of America has come in and followed us.”
To be sure, more mergers of commercial and investment banks could be on the horizon. Commercial banks like Bank of America and Wachovia, which make most of their money from traditional banking rather than Wall Street-style services, such as trading and underwriting stocks and other securities, can provide stability and steady funds for investment banks. That's something they've needed desperately since the credit crisis began.
Monday, Merrill CEO John Thain said that independent investment banks will “come under pressure” to get funding. Bank of America's Lewis has said for years that commercial banks would eventually own investment banks.
Such mergers got a boost from the 1999 repeal of the Glass-Steagall Act, a Depression-era regulation that segregated commercial and investment banks.
Nancy Bush, of NAB Research in New Jersey, predicted more hardships for investment banks, because their business of advising companies in mergers, issuing stocks and bonds, and packaging securities to sell has dried up as the economy cooled. “The investment banking sector has way too much capacity for the amount of business that will be there in the next five years,” Bush said.
Dick Bove at Ladenburg Thalmann said that failures among brokerages, mortgage companies and thrifts will make commercial banks “the core” of the new financial system. That, he pointed out, will benefit Wachovia.
But Gerard Cassidy, an analyst at RBC Capital Markets, notes that the major remaining investment banks on Wall Street – Goldman Sachs, Morgan Stanley and Lazard – are in much better shape than Merrill or the failed Bear Stearns or Lehman.
“I don't think they're going to be required or feel obligated to buy a bank,” he said.
Bill Cline, at the Cline Group in South Carolina, agreed. “That being said,” he added, “Wachovia remains a very compelling franchise.”
Bank of America's purchase of Merrill is a one-up against Wachovia, which had cherished its large retail brokerage operation as one of the few areas where it dominated its crosstown rival. Bank of America is already No. 1 in credit cards, home loans and consumer banking. Without the Merrill purchase, it had about 4,500 financial advisers in its premier banking and investments unit. After the merger, it will have 20,000. Wachovia, meanwhile, has just under 15,000 – making it a top player and in line with Citigroup. Last week, Steel praised the progress of Wachovia's integration of the A.G. Edwards brokerage, which it bought last year.
But Wachovia is a commercial bank first, and Steel noted Monday how that has helped it weather a tumultuous year. The bank's mortgage portfolio has been the root of most of its troubles. But the bank is reworking many of the problem loans, Steel noted on CNBC's “Mad Money,” and writing down some of the others.
Wachovia shares fell 25 percent Monday, to $10.71, after Deutsche Bank's Mike Mayo worried about bigger-than-expected losses from option adjustable-rate mortgages.
Bush, the analyst, notes how the Merrill deal appears to validate the model that former Wachovia CEO Ken Thompson had followed. With mergers with Prudential Securities and A.G. Edwards, he created a large brokerage force to complement his bank branch network, just as Bank of America will have with Merrill Lynch.
Wachovia dismissed Thompson in June as it reeled from its purchase of troubled mortgage company Golden West Financial.