Sentiment is growing that Bank of America Corp.'s Kenneth Lewis may have won a place in the pantheon of great Wall Street titans by using his financial clout to help the country avoid economic ruin.
In some circles, Bank of America's is being seen as critical to the end of the Panic of 2007.
On Monday, The Wall Street Journal crowed that "the deal at once helped stabilize the credit markets and gave Bank of America a foothold in the nation's biggest mortgage lender." The move also was a tonic for a company that was driving "depositors into branches to withdraw funds and [sending its] stock tumbling," Merrill Lynch wrote in a negative credit report that mentioned the possibility of bankruptcy
"The infusion also may help to reassure investors that the mortgage market is safe after rising default rates sparked a global credit crunch," Bloomberg said. In Europe, Agence France-Presse observed that Lewis "boosted confidence about an easing of the credit squeeze," and that this was "a sign of confidence that the storm in the mortgage sector may be ending."
The B. of A. move comes exactly a century after J.P. Morgan -- back then, the man and the bank were the same -- helped stem the Panic of 1907. That year, depositors made a run on two U.S. banks. Morgan responded by convincing U.S. Treasury Secretary George Cotelyou to inject $25 million into the banking system. Sound familiar?
Morgan also created a $3 million pool to save Trust Co. of America. Responding to pleas from the New York Stock Exchange, Morgan, leading a consortium of bankers, pledged another $25 million to back the exchange. He also bailed out New York City by backing a $30 million bond issue.
In today's terms, that would be about $600 million for the banking system, $71 million to Trust Co. and a $631 million bond issue. Morgan didn't put up all the funds, but he organized the relief.
His reward? Morgan helped the economy, and in turn his own assets. Brokers on the floor of the NYSE cheered his action to help the exchange so loudly that he could hear the roar from his office across the street at 14 Wall St. A thankful Washington allowed him to buy a railroad worth about $16.7 billion today for $1.1 billion.
Morgan isn't alone in coming to the rescue during a financial crisis. Other financial titans have come forward to offer help, albeit smaller in scale. Recently, Warren Buffett rescued Salomon Brothers in 1991, and a consortium of banks rallied by the New York Federal Reserve bailed out Long-Term Capital Management by putting up $3.6 billion in 1998.
U.S. banks also stepped in to buy flailing savings and loan thrifts in the late 1980s and '90s. They usually scooped up assets as discount prices.
'Bank of America was just looking for a bargain, and essentially got one.'
— Charles Geisst, professor and author
This idea of bailing out by bargain-shopping is really what's at work here with Lewis. "Bank of America was just looking for a bargain, and essentially got one," said Charles Geisst, a history professor at Manhattan College and author of several finance books, including "Wall Street: A History, From Its Beginnings to the Fall of Enron."
Geisst believes that the Countrywide acquisition didn't even really stabilize the mortgage markets, as some have suggested. The market for mortgage-backed securities is still impaired, he commented.
This leaves Lewis as more of a shrewd opportunist than patriotic investor. He and B. of A., after all, have been pining for a piece of Countrywide for more than five years.
Not only did the executive get the stock at a deep discount of nearly 50%, but also the shares pay a 7.25% dividend. What's more, the investment immediately returned a paper profit of more than $400 million after the deal was announced and Countrywide's stock soared.
For those longing for a Wall Street baron to save the markets like the great J.P. Morgan, there may be opportunity yet.
"We will get some rescues," Geisst said, pointing to the decision by B. of A., Citigroup Inc. to borrow $500 million each from the Fed's discount window.
"Those four going to the discount window is like someone from the Upper East Side going to Wal-Mart," Geisst added. "They were probably fronting in the marketplace for an institution that was really in trouble."
Maybe there's a modern-day Morgan out there. We can all pitch in and buy him a railroad.
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