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Perry Rod




02/20/09 at 5:28 PM CST



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Nearly Identical Bank Of America Preferred Stocks Trading At Dramatically Different Yields

Only in unprecedented times like these will you ever see the following situation.  Merrill Lynch Trust Preferred stock (stock symbols MER-D, MER-E, MER-F, MER-K, MER-P, MER-U) closed on Friday with an average yield of over 26%, while the virtually identical and better known Bank of America Trust Preferred stock (stock symbols BAC-B, BAC-C, BAC-U, BAC-V, BAC-Y, BAC-Z) closed with at an average yield of around 17%.  That's a difference of over 50%!

I bet you didn't even know that Merrill Lynch still had stock.  Apparently, the market is not aware of it either.  Bank of America, whose assets and operations are just about inseparable with Merrill Lynch by now, has yet to fully assume the preferred shares or any of Merrill Lynch's debt.  In Bank of America's acquisition of Countrywide, BofA also waited months after the deal closed before formally assuming all of the debt.

Aside from Bank of America altogether failing, which would eliminate any value in all of the associated preferred and common stock, there does not seem to be any precedent for it to even be possible that somehow Merrill Lynch Trust Preferred stock could go down in flames while Bank Of America Preferred Stock survives.  That would mean Merrill Lynch, whose business is already intertwined with Bank of America, would have to somehow go bankrupt as a separate unit, while Bank of America survives.  Aside from that nonsensical scenario, the preferred shares have the exact same capital structure and everything but the names are completely identical.

And yet, take a look at these examples: BAC-U trades at a yield of 15.58% while BAC-C trades at a yield of 19.88%.  It's the exact stock with dramatically different yields!  But then, it gets really crazy when compared to Merrill Preferred stock (which, again, are nearly identical).  MER-C closed with a yield of 26.79%.  Compare that again to BAC-U at 15.58%.  It's an astronomical difference in terms of yields.  Among each other, the Merrill yields also vary wildy for no reason.

This would never occur in an efficient market, but again, we are in unprecedented times where somehow, something like this is being unnoticed.  What is even more amazing is that this has actually happened before.  When Bear Stearns merged with JP Morgan, there was a period where the yields did not match at all.  It happened again with Wachovia and Wells Fargo.  Today, they all have nearly identical yields.

While it's impossible to know what ends up happening with Bank of America, one thing seems fairly certain:  This discrepancy will not continue forever.  These trusts are all cumulative and even senior to the government's investment.  The main risk to them is the risk of BAC as a whole - nationalization or overall bankrupcy.  That aside, there is no logical explanation for the yield discrepancy outside of a still, terribly inefficient market.


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