It's A Deal
January 9, 2009
Shifting Risk
To ring in the New Year, Bank of America wrapped up its remarkable buy of Merrill Lynch. The reaction from the rating agencies was pretty much unanimous, as evidenced by the torrent of BofA downgrades shortly thereafter.
Nothing overly surprising about that, I suppose. BofA is well-known to be solid, if not spectacular, when it comes to integrating companies it has acquired, but Merrill is a different animal. There are lots of moving parts, some questionable assets on its books that you may have heard something about, and the usual “culture” issues to contend with when you mesh two large financial-services companies.
But what caught my eye was the discussion of risk management at the newly combined commercial bank/investment bank/brokerage firm. Moody’s believes BofA’s risk management practices will have to get beefed up to properly swallow Merrill and its vast and complex cap-markets businesses. Ya think?
“Moody’s would also consider a (further) downgrade if there is evidence of risk management weaknesses resulting from the integration of Merrill Lynch.”
In that case, they might as well pull the trigger on that downgrade now and save us the suspense. (As an aside, does anyone else out there find it fascinating that the rating agencies continue to wield so much power—or any power—despite their, well, slight miscalculations of the recent past?)
The good news is that risk management is increasingly becoming part of Wall Street’s lexicon, if two years and $3 trillion too late. But this is going to be a bear of a problem not only for BofA but for JPMorgan, Barclays, Wells Fargo and anyone else who bought.
As we pointed out in an IDD cover story last spring—well before it became the popular topic it is now—risk management and culture are no easy things to join.
As one risk professional told us back then, “More often, the person who was shot early on was the chief risk officer, when in fact the CRO had fairly well-developed processes in place but the broader organization wasn’t paying attention to what they were saying.”
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