Wall Street's Winners and Losers

Sept. 16, 2008— -- As the dust settles from this weekend's turmoil on Wall Street, some winners and losers have emerged from all the action.

Clearly Lehman Brothers, its employees and shareholders lost out when the 158-year-old brokerage firm filed for bankruptcy. And New York residents could lose a lot as the state and city economies suffer from Wall Street's coming job losses.

But there are plenty of winners, too. The largest is likely to be Bank of America.

In a rushed deal, scraped together in just one weekend, Bank of America ended up purchasing Merrill Lynch in an all-stock transaction worth about $50 billion.

For years, Bank of America has aggressively expanded to become the second-largest bank in the country, by assets, after Citigroup. If the acquisition of Merrill, the world's largest brokerage, goes through, Bank of America is likely to take over as the new king of the banking world.

Merrill CEO John Thain could also benefit from the deal. He has been at the helm of the investment bank for less than a year but still could receive a $9.7 million payout, according to estimates by a pay advisory firm. That payment could happen whether he stays on the acquired company or moves on to a new job.

Richard Bove, managing director of Ladenburg Thalmann & Co., called these times scary, very scary.

"I feel a greater amount of fear now than any other time, and I've been in this business since 1965," Bove said.

What is of particular concern for him is how some large institutional and short sellers are able to move the markets so far, so fast.

"It doesn't really matter anymore what's happening in the real world. What matters is the psyche of the people driving stock prices," he said. "In my view, Lehman Brothers was not a company that deserved to be driven out of business."

The Job Loses

It is still too early to say how many people are going to lose their jobs. But experts estimate that following Lehman's bankruptcy and Merrill Lynch's sale, financial sector job losses will total tens of thousands, most of them in New York City.

New York City Mayor Michael Bloomberg said the jobs losses would have an impact on the city's tax revenues. By 2010, he said, the city is projected to have a $2 billion budget deficit.

But Bloomberg also said that the city would remain resilient.

The "vital signs of the city's economy remain strong -- a lot stronger than in much of the rest of the nation," he said. "New Yorkers have gotten through the ups and downs of Wall Street before, and we will get through this one, too. We know how to make tough decisions, we know how to come together, and we know how to emerge a stronger city as a result."

There is also another loss for New York in the Merrill sale: the disappearance of a global business headquarters from New York. Bank of American is based in North Carolina and with all its past acquisitions oversight functions have shifted from local markets to North Carolina. While Merrill is likely to always have a strong presence on Wall Street, it will probably become more of a North Carolina operation, benefiting that state but hurting New York.

Who is to Blame?

Lehman Brothers CEO Richard S. Fuld, Jr. has been taking most of the brunt. Just back in April he declared that the worst of the credit crisis had passed. Now, five months later, his company is in bankruptcy court.

He has been cast in the same light as James Cayne, the former head of Bear Stearns who was heavily criticized for playing in bridge tournaments while his firm crumbled.

Fuld got a $22 million retirement package in 2007; not giant by Wall Street standards but a lot more than the thousands of Americans losing their homes could ever dream of seeing in their lifetimes. But his reputation will probably be tarnished for some time.

For proof, look no further than a recent Financial Times commentary. The headline said it all: "Hubris – is thy name Richard Fuld?"

It's probably too early to tell if Treasury Secretary Henry Paulson emerged a winner or loser but it is worth noting that many of Wall Street were pleased to see him finally draw a line on taxpayer-backed government bailouts.

Paulson addressed what many refer to as the moral hazard issue: banks and investors will make riskier decisions if they know that ultimately the government will bail them out. By drawing a line with Lehman, he -- at first blush -- appears to have won. But it is still too early to tell the ultimate outcome there and the quickly deteriorating situation at AIG might ultimately force Paulson into another government bailout.

A Banking Giant Grows More

By acquiring Merrill, Bank of America gained a major position in the investment management business, the ability to move into overseas markets and a large sales force.

Bank of America's stock did fall more than 21 percent Monday, but several analysts said that was because of the short-term problems with a merger and some people who felt that the giant bank was overextending itself.

"The merger is a superb merger in normal times," Bove said. "But in times like this, it was evident that Bank of America's stock was going crumble because it was going to pick up all of Merrill's problems."

Bank of America is a behemoth. It has the country's most extensive branch network, with more than 6,100 locations covering some 30 states from coast to coast.

And it got that big over a short period of time.

In 2003, it paid $48 billion to acquire FleetBoston, giving it more branches and customer accounts than any other in the United States. Just two years later, Bank of America bought MBNA for $35 billion, making it the largest credit card issuer.

Mergers and Acquisitions

But the acquisition trend didn't stop there.

At the beginning of this year, Bank of America bought out the troubled Countrywide Financial, a giant lender often blamed for pushing many of the risky loans that started the housing crisis. It was a risky acquisition for Bank of America because it took on some bad loans, but at the same time it gained a much larger long-term foothold in the lucrative mortgage business.

And that growth just continues now with Merrill Lynch.

"I think that Bank of America has wanted an asset for years and has looked at this asset at higher prices," said Art Hogan, chief market analyst at Jefferies.

"It might have been cheaper in a few days," he added, but "they were probably willing to pay twice as much this time last year."

It will probably take until 2010 for Bank of America to see profits from the deal as it spends money on the acquisition and on merging the two workforces. Those expenses are part of why the stock fell today.

Basically, Hogan said, "This market is focusing on 2009."

And as for what's going through the minds of the folks at Citi this week, Hogan said: "You just got a larger competition. Somebody's knocking at your door, you're not going to be No. 1 anymore."

With reports from Alice Gomstyn and Rich Esposito