A Lesson on “Moral Hazard” – How Companies Are Taking Advantage
Case-in-point: Bank of America
Remember what set off the current Wall Street crisis?
The first huge company to go belly-up was Countrywide. Who bought them? Bank of America.
Now, Merrill Lynch has gone to… Bank of America.
Are we really supposed to think that BofA just loves the risk of bad entries on its books or that its mission statement is to be benevolent to other companies in crisis?
Here’s an article that inadvertently clears up the issue by reading between lines:
“‘Bank of America will be stronger, larger, and command more business than ever before once this debacle is over.'”
So, they’ll be one of those huge companies, it seems.
“…Combining Merrill Lynch’s wealth management and investment banking operations with Bank of America’s coast-to-coast branch network and deep customer base among the affluent and corporate America is expected to pay big dividends for the combined company.”
Meaning that anything they do might seriously affect a huge number of individuals and businesses alike, most of whom are heavyweights.
“At Monday’s press conference to announce the Merrill Lynch acquisition, [CEO Ken] Lewis said the merger was the ‘strategic deal of a lifetime.'”
Because now Mr. Lewis knows that his company is so big, and this its customers are so influential, that if all of these acquisitions fail and flop, Big Brother will be there to save his company and give him his departing monies.
My Point: It is now clear to anyone with a brain that the government will almost certainly bail out huge failing companies and pay their boards’ severance pay. Though the case of Lehman shows that nothing is 100% for sure, I’d say that BofA is taking quite the wise gamble with such odds on its side: either they will thrive on these deals through normal business or they will be bailed out anyway.
Oh, and in case you were wondering whether BofA was simply making good business sense, there’s this:
“‘If these were normal times, this deal would be viewed as a huge success for both companies.'”
Um, so, why did they wait until now? Oh, right, because BofA was waiting to see if it could “bank” on a government safety net.
Watch to see who BofA will buy next; maybe it’ll be the government itself.