"Everybody wants to eat at the government's table, but nobody wants to do the dishes"
Werner Finck
If you were one of the many of us who thought that government's "eminent domain" powers only applied to real property - I have some bad news to report- as it turns out, our government can now condemn your intangible property as well, including all of your rights as a shareholder, including "fair disclosure", "equitable" compensation etc! Heh? What are you talking about, one might ask?
Strangely enough you are unlikely to hear the public outcry on the matter quite yet, and instead every "talking head" out there is still focused on blaming the "evil bankers" for virtually every possible economic problem, using Bank of America's most recent bailout as an example. Unfortunately, just as it usually happens, media conveniently chose to ignore the key point of the entire BofA/MER fiasco! After learning about the deepening losses at Merrill in December- Bank of America tried to back out of the hastily arranged deal (fairly common practice and a normal capitalist way of doing business) but instead was forced to complete it by the Federal Government!
No one should take the blame of "Ken Lewis and Co" for running the share price of one of the best and strongest banks in the United States (Bank of America) into the ground by completing a series of "overpriced" acquisitions. But let's remember-despite all the "doom and gloom" and insolvency headlines in the media- Bank of America still made $4B in 2008 and only reported one quarterly loss during the last 17 years. Very few banks in the country have a similar record, earning power and deposit franchise to deal with "deeply recessionary" economy.
But by forcing the purchase of what now increasingly looks like a "virtually insolvent" institution, Merrill Lynch, to completion- Uncle Sam has introduced an entirely new concept to investing called "eminent domain" or "condemnation of private property for a public use". Unfortunately, if you were one of these "lucky" BofA owners (shareholders) over the last several weeks, it is now increasingly clear - government (in the form of Treasury Secretary Paulson and Co) doesn't really give a damn about your financial interest.
Instead, they decided that because of some vague "national-interest" consideration, Bank of America was somehow obligated to complete the "unwanted" transaction despite having no real legal obligation whatsoever to do so, and in the process disregarded interests of all of its owners (equity and debt holders) except of the Uncle Sam himself. How is that for a fair use of the Fifth Amendment? I say this deal should go all the way to Supreme Court to make sure Feds learn the lessons of proper "Public use" and "Just compensation"!
Wasn't the government obligated to "justly compensate" the true owners of BofA (shareholders) for this expropriation/condemnation of their property? Issuing a bunch of "high interest" preferred claims that are senior to those of common equity shareholders is most certainly not the right way to accomplish that! If BofA's claims that Bernanke and Paulson have forced Lewis and Co not to invoke the "material adverse change clause" to back out of the Merrill transaction are indeed confirmed, the wave of shareholder lawsuits is guaranteed to get very long very quickly...
The only winners in this BofA/Merrill debacle seem to be shareholders of Merrill - instead of being completely wiped out, somehow John Thain and Co managed to receive 23% ownership of one of the formerly most successful banks in the United States. Why in the world didn't the government let BofA to at least amend the terms of the acquisition to $1 a share or even zero, despite the ridiculous December losses at Merrill?!
What's even scarier now is that instead of stabilizing the financial system BAC/MER intervention seems to have opened the next chapter in the financial crisis. Instead of focusing on attracting new private capital into the system, now everyone will be simply wondering what, when and who is next? Will tomorrow bring a similar announcement for Wells Fargo or JP Morgan shareholders? How PNC? Does government really understand that decimating private shareholders of the "healthier" banks at the expense of the Uncle Sam's interests can only achieve one possible outcome that of complete nationalization of the entire financial system?
Remember, if bank like BofA with it's incredible earning power can't make it out of this crisis alone, prospects for virtually every other financial institution are unfortunately much grimmer than many of us might think ... And while I continue to be one of the few believers that American economy has not yet lost its amazing ability of to come out much stronger out of any crisis, dangerous mistakes on the part of the US Treasury and Federal Reserve are now exacerbating the pain and could still lead to a very unwanted outcome of the virtually nationalized and continually paralyzed banking system...
Stay safe out there if you still can, and remember - in today's market nothing can or should be taken for granted! Shorting individual stocks while legal today, could be changed to illegal tomorrow simply and thus is quite dangerous. On the other hand being 100% long common equities could still be quite premature given the yields available on many fixed income securitie...
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