Ken Lewis' Appetite- An Addendum

In my prior post, I discussed, at length, why I think Ken Lewis has made a disastrous mistake for his shareholders in his purchase of Merrill Lynch at $29/share.

He could have waited longer, or even for bankruptcy, in order to pick up the firm's "assets," such as they are, more cheaply. Perhaps buy the interest in BlackRock at a lower price. Maybe directly hire whole brokerage offices or just brokers, if Lewis and his management truly feels they are still valuable.

But, having watched CNBC yesterday, there is one narrow, one-time opportunity which Lewis may, unwittingly or with intent, be pursuing.

Because so much of the recent write downs of assets by investment and commercial banks are more correctly described as 'markdowns,' as a CNBC guest noted, BofA may be betting on the eventual remarking of Merrill assets upward.

As I have noted in prior posts this spring, such as here and here, totally aside from Ken Lewis' claim to have foreseen the collapse of investment banking seven years ago, two types of institutions can weather markdowns- private equity and commercial banks. Specifically, at the end of the second post, I noted,

"Now, however, we have performing structured finance instruments which have no markets because of their questionable asset value, not their income streams. And commercial banks are as culpable as any other financial institution in this mess.

BofA, Chase and Citigroup aren't your father's bank anymore. It's debatable, in the wake of Glass Steagall's demise, that any publicly-held brokers or investment banks should or can really exist independently of a commercial bank. In the new environment of securitized toxic structured finance instruments, a large commercial bank is uniquely able to survive, by dint of its Fed access and judicious use of its 'investment account' provisions."

While I stand behind my prior post's conclusion regarding the long term nature of consistency, or lack thereof, of Ken Lewis' BofA, I will agree that, because of a commercial bank's ability to use the investment account, Lewis may have cleverly executed a one-time low-ball purchase of some assets that will continue to perform and, eventually, be remarked up. This will result in a one-time gain, probably reflected, at some point, in the equity price of BofA.

Lewis may even use the old commercial bank trick of carefully 'realizing' higher values on these securities in a more or less consistent stream of markups.

But that won't be long term operating profit. It will be managed recognition over time of a one-time asset buy at bargain basement prices.

I still do not think that BofA is now poised to perform well as an equity in the future, aside from the unpredictable effects of periodic markups of securities it may have purchased with Merrill Lynch.