Prize for banking giant Bank of America carries significant risk, not just rewards

NEW YORK — Merrill Lynch's shotgun sale to Bank of America will create the nation's largest financial-services company — one that some believe is too big to fail. Still, no one is breathing easy.

The deal keeps Merrill from a Bear Stearns-style fire sale or a total meltdown like Lehman Brothers while removing a major player that some expected to be the next shoe to drop in the credit crisis.

At the same time, it will enable BofA to expand the financial services it offers to its already huge customer base.

Still, the challenges are enormous. The two companies have starkly contrasting cultures. Billions of dollars of bad debt remain on Merrill's books, while BofA still faces huge consumer-credit losses.

And the deal was slapped together in less than two days, meaning the two powerhouses might not know exactly what they are getting themselves into.

"It's a big gamble," said Alois Pirker, senior analyst at Aite Group, a financial-services advisory and research firm. "They could be the No. 1 financial-services firm in all areas. But if it doesn't work out, it could go very badly."

The deal, originally valued at $50 billion, happened as bank and government officials met over the weekend to decide what to do about Lehman Brothers, which ended up filing for Chapter 11 bankruptcy.

In an attempt to avoid the same fate as Lehman, Merrill Lynch — whose stock has also been plunging — says it asked Bank of America if it was interested in a deal.

Bank of America shares fell $7.19, or 21 percent, to $26.55 Monday, and Merrill rose a penny to $17.06. Based on BofA's closing price, the deal was valued at less than $40 billion, or $22.82 a share.

Merrill Chief Executive John Thain called Bank of America CEO Ken Lewis Saturday morning from a meeting between government and banking officials to discuss how to save the U.S. financial system from Lehman's collapse. Lewis came to New York immediately and hammered out a deal.

"This was a Hail Mary. They wanted to get so big that now, it will be easier for them to get financing, get the Fed to help them or get a bailout because now they're really too big to fail," said Peter Schiff, president of Euro Pacific Capital. "That's the name of the game — get yourself so big that the Treasury won't allow you to go under."

The deal comes as Charlotte, N.C.-based Bank of America tries to digest mortgage lender Countrywide Financial. It was about to go belly-up before BofA snapped it up early this year.

But even if the deal had occurred at an easier time in the industry, investors might still be wary because the cultures of Bank of America and Merrill Lynch are so different.

"Culturally, you're merging a staid and stable Southern banking culture, if you will, with a New York, down-and-dirty street-fighting culture. I don't think they could be further apart," said Rob Hegarty, managing director at Tower Group.

Hegarty said Merrill Lynch is "going to have to lower their risk profile in order to come under the BofA umbrella. There's no question that neither the BofA management nor BofA shareholders have the stomach for a swashbuckling Wall Street investment firm."