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U.S. regulators have pushed Bank of America Corp. to show what measures it could take if conditions worsen for the Charlotte, N.C., lender, according to people familiar with the situation.
Executives of the bank recently responded to the unusual request from the Federal Reserve with a list of options that includes the issuance of a separate class of shares tied to the performance of its Merrill Lynch securities unit, these people said. Bank of America purchased Merrill Lynch in 2009, and it has become the bank's most profitable division.
Chief Executive Brian Moynihan isn’t expected to pull the trigger soon, if ever, on the creation of a so-called Merrill Lynch tracking stock. Such a move would raise money from investors but could be viewed as counter to Mr. Moynihan’s strategy of knitting together the disparate parts of the franchise into a cohesive whole. Its inclusion on the list as a theoretical option shows the bank is considering all possibilities as it wrestles with an array of problems weighing down its shares….
The Fed’s call for more documentation about what the bank might do in more-extreme circumstances was a response to uncertainty about a U.S. economic recovery and a downward swing in Bank of America’s share price earlier this year, one of these people said. It was a one-time request, although the Fed has done the same with other firms in the past.
Bank of America did the analysis at the Fed’s request in late July and early August and then provided the Fed with its menu of options, said people familiar with the situation. Some items, such as the tracking stock, were more theoretical than others.
Mr. Moynihan isn’t giving the tracking stock serious consideration at this point, said a person familiar with the situation, but he included it on the list to show the company has multiple levers to pull.
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More on the Merrill Lynch tracking stock from the WSJ...
Excerpt
In a list sent to the Federal Reserve of potential measures the bank could take should its situation worsen, BofA included the idea of a tracking stock for Merrill Lynch, according to a Wall Street Journal article. The trouble is such a move wouldn't necessarily signal strength. If anything, investors might interpret it as a sign of desperation.
For starters, tracking stocks, which typically don't confer ownership or voting rights on holders, have a fairly dismal history. They conjure images of dot.com days, when the instruments came into vogue.
Then there is the idea that a tracking stock for Merrill, which BofA purchased in early 2009, would really make investors ascribe it more value than BofA overall is currently getting credit for.
That is a stretch. If anything, a tracking stock would call into question whether the business is being fully integrated into BofA. It also could stoke speculation of a breakup. Investors don't foresee that, and the prospect of it would cause worry.
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Here's the correct solution to the Bank of America death spiral:
Chris Whalen Recommends Chapter 11 Bankruptcy For Bank Of America: Default And Liquidation Under Dodd-Frank