Bank of America (BAC) update

We are short shares of Bank of America (BAC) and today we got an incredible gift—the company announced that they will be buying Merrill Lynch (MER) for $50 billion. This shotgun wedding—evidently encouraged by the Feds who had originally hoped either MER or BAC could be persuaded to purchase Lehman Brothers (LEH), and thus cover that firm’s losses (Lehman Brothers announced they were going bankrupt today)—is essentially a rescue of Merrill Lynch, which were threatened with insolvency due to losses related to credit default swaps they had created and damage from the LEH failure.

We consider the fact that BAC management are purchasing MER with so little due diligence to be recklessly imprudent. And we consider the fact that they are paying $29/share after MER stock closed Friday at $17.05—and is arguably worth much, much less—to be dazzlingly stupid. And the market overwhelmingly agrees with us, as today BAC—on all-time high volume of 276 million shares—closed at $26.55, down 21% from last Friday.

We should probably cover here, with a one-week profit of 23%, but we are very confident that worse is yet to come for BAC.