December 3, 2008 – 2:30 pm


After the waterboard force-feeding of Countrywide Financial and Merrill Lynch, Bank of America finally went after some tasty treats of its own delight – China Construction Bank. Bank of America had already invested $4.9B in the bank, an investment which  tripled to $14.5B as of Sept 30, according to Bloomberg.

Bank of America Corp. will pay $7 billion to almost double its stake in China Construction Bank Corp., adding to the purchase of Merrill Lynch & Co. even as it cuts jobs and gets government bailout funds.

Chief Executive Officer Kenneth Lewis, three weeks after getting $15 billion from the U.S. government, raised his bet on China Construction after the stock lost 45 percent in the past six months. He is paying 32 percent less than yesterday’s closing price.

Another way of looking at it is that the original stake is 32 percent less than yesterday’s closing price, but that’s way too negative. So, let’s do some quick math here, as of Sept. 30  Bank of America had $14.5 billion sunk in China Construction Bank Corp., then with half that amount it doubled down the size of its stake. Well sports fans, that tells some of us the shares of China Construction are headed the wrong way. But some advisers on the Street think that’s the right direction. Witness:

“People should be delighted that Bank of America is thinking long term about its options and isn’t just barricaded in their shack out in the woods,” said Daniel Rosen, principal of Rhodium Group, a New York firm that advises companies on overseas investments.

Yeah, thanks Dan. What’s your take on the deal? Is it more than all the salaries of all the new ex-employees of Bank of America put together?

Lewis slashed his dividend by half after reporting a 68 percent drop in third-quarter profit because of rising losses on consumer and business loans. The bank has raised $22 billion by selling common and preferred shares this year, including $10 billion in October to help pay for its Merrill Lynch acquisition.

Thousands of Merrill Lynch and Bank of America employees will lose their jobs because of the merger, Merrill CEO John Thain said on Oct. 20. The purchase is expected to be completed on or about Dec. 31.

This acquisition is just another stop gap to fund the catastrophe du jour. The write-downs and blow ups for previous binges are exploding and Bank of America thinks it can stave them off with quickie pick ups and press releases. They can’t.

Bank of America acquired mortgage giant Countrywide and Merrill Lynch during the past year, which are two of the most influencial companies in their industries. Luckily, the bank was able to get a deal on both firms thanks to turbulent financial markets. The big question is whether or not Bank of America has enough money to keep the positions held by these firms running smoothly while the markets current themselves. If so, Bank of America shareholders may be in for a pay day.

Well actually there is no question at all, Bank of America is insolvent, so it does not have enough money to keep the positions held by these firms running smoothly unless it find another acquisition to cannibalize and discard. All this happens while the markets current themselves, whatever that means. The markets are crashing and crashing hard. That is the reality investors and employees must live in and deal with.

The mortgages and securities held by Countrywide and Merrill Lynch may not be worth a lot now, but they could increase in value over the next few years. These long-term assets are subject to short-term pricing disparities thanks to mark-to-market accounting, which requires that the value be the current market price. So, even if a security is worth a lot of money (by taking the present value of its future cash flows), it isn’t worth a dime on the balance sheet if no investors want to purchase it. Fortunately, a recovery in the credit market will help these purchasers come back out to play.

The mortgages and securities held by Countrywide and Merrill Lynch are not worth a lot now, and almost certainly never will be because a recovery in the credit market is extremely unlikely. Those markets were a bubble and only another credit bubble will bring them back to sea level, let alone profitability.

And even as the bank gets cut down by UBS, its CEO Kenneth Lewis speaks with a forked tongue from both sides of his mouth. Witness:

Chief Executive Kenneth Lewis said on Thursday he is “optimistic” the financial system is near the end of a painful deleveraging process that has throttled credit markets and dethroned some of Wall Street’s mightiest names.But Lewis warned 2009 would be another “tough year” for the finance industry with credit costs unchanged, if not higher, than in 2008, and rising charge-offs in credit cards as the economy worsens and unemployment climbs.

Well which is it Ken, is it that “the financial system is near the end of a painful deleveraging process” or will 2009 be another “tough year?” Is the end of 2009 near? Ken didn’t say, but he just won’t quit:

Asked if the unnerving, seemingly unending series of multibillion-dollar writedowns by banks was at an end, however, Lewis said, “I could answer that question with great confidence today and feel like a fool tomorrow. We’ll just have to let it play out.”

He declined to predict how many jobs the sector might shed before the rebound begins but warned the layoffs weren’t over.

“I can’t predict employment levels but I can predict it’s going to be a tough year,” he said.

Well, let’s start with about 10,000, Ken. Is that a good start? Like everything else in the credit crunch, we think that number is very likely to grow exponentially, to something like 30,000.

Bank of America could end up cutting 30,000 jobs as it moves to absorb Merrill Lynch, three times as many as previously estimated, sources told CNBC.

But, Ken, why don’t you tell us if that’s a good ball park estimate?

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