WASHINGTON — With Bank of America Corp. coming back for a second helping of government aid, it is hard not to ask: Are regulators creating the next too-big-to-manage company, a la Citigroup Inc.?
And the question is all the more relevant considering reports that the government has been leaning on Citi to slim down after investing $45 billion in the New York company and agreeing to backstop $306 billion of assets.
"It does seem somewhat hypocritical to be asking one institution to … break up when you are putting pressure on another institution to grow," said Walter Schmidt, a senior vice president at First Horizon National Corp.'s FTN Financial Capital Markets Corp. "It doesn't seem to make sense."
Still, some argue that B of A is no Citi — saying that the Charlotte company is better managed and, even after its deal for Merrill Lynch & Co., much more focused.
"They are completely different situations," said Tim McTaggart, a partner in Pepper Hamilton LLP. "The difference is in the retail side. … B of A has an extraordinary and seasoned management team that has built a tremendous retail banking franchise. That is a huge competitive advantage. That wasn't the Citi model."
Supporters said B of A has earned more government support because its problems are largely tied to its acquisitions of Countrywide Financial Corp. and Merrill Lynch — companies the government wanted the banking giant to absorb. Citi's problems, they argue, are tied to its own strategy to broaden the company's reach that backfired.
At Citi "it was their managers who decided to do the collateralized debt obligations, who decided to set up the structured investment vehicles," said Lawrence J. White, a finance professor at New York University. "They actively participated in these negative-net-worth activities."
B of A, he added, "showed poor judgment in deciding to acquire" Merrill and Countrywide, "but it feels like a different level of poor judgment … to know you made bad acquisitions, versus people on your watch did a whole bunch of loss-creating things."
Douglas Landy, a partner at Allen & Overy, said another difference is Citi's global scope.
"Citi was considered too big to manage because it had so many different lines of business across the globe that were targeted at different" sectors, he said. "While they are all financial businesses, they're managed totally differently. I don't think there's ever been a company that's tried to do it on the scale that Citi tried. People felt that it was an experiment and, obviously, one for which they did not have the right solution."
Robert Clarke, a former comptroller of the currency, agreed that though the Merrill purchase was huge, the lack of significant international activity "makes B of A's business model a little simpler."
Regardless of the deal's merits, however, the government also has a keen interest in seeing the B of A-Merrill transaction succeed. If it fell apart, it could further panic the financial markets and destabilize the system.
"It simply can't" allow the B of A-Merrill acquisition to unravel, said Lee Bradley, a managing director at the Dallas investment bank and consulting firm Commerce Street Capital LLC. "It's been deemed a necessity."
Jeff Davis, the director of research at Howe Barnes Hoefer & Arnett Inc., agreed.
"Bank of America is not a Citi, but it's like a Citi in that it's too big to risk letting it fail," he said. "The government will do what it has to do to support B of A."
Reportedly, Bank of America told the Treasury Department that the Merrill deal would not close without more government assistance. The deal did close Dec. 31 but with the understanding that aid would be negotiated. Nothing official has been announced, but B of A is said to want a cap on the amount of Merrill's losses it must absorb. The company is expected to release more details when it discloses fourth quarter earnings today.
Citi got a similar deal in November when the government agreed to guarantee Citi loans under a loss-sharing deal and put an additional $20 billion of capital in the bank. Since then, regulators have ratcheted up pressure on Citi to become smaller. The company struck a deal last week to spin off control of its Smith Barney brokerage business to Morgan Stanley and is planning deeper divestitures.
Some lawmakers are already protesting the prospect of helping B of A further.
"We continue to go down the same road into uncharted waters and who is next?" Sen. Richard Shelby, the lead Republican on the Senate Banking Committee, said in an interview Thursday. "Who's going to be next? … Who's going to be next — six, eight months or a year from now?"
The Alabama Republican said regulators should continue to shrink Citigroup. "Citigroup has got to be stripped down to survive — if they survive," he said.
And he said making B of A bigger is "absolutely not" a good idea. "But it's the same road that we've been going down, and I'm against all that," he said.
Some analysts agree, saying no company can handle the growth Citi took on before the crisis and that B of A is facing now.
"At some point — I don't know if it's going to be next month or next year — I think B of A is going through the same process as Citi," said Paul Miller, an analyst at Friedman, Billings, Ramsey & Co. "What we've done now is created giant problems that I now think are going to push back on the size of these institutions in general. The big-bank model in my book is dead."
Mr. Schmidt said it is "entirely possible" that B of A will face the same fate as Citi.
"This is one of these sorts of things" where "you think about eventual outcomes," he said. But policy now is "being done with a one- to three-month outlook."
Analysts said it is already clear the company made a mistake in buying Merrill. "It puts a tremendous amount of uncertainty on B of A's forward earnings stream at a time when capital is precious," said Jefferson Harralson, an analyst at Keefe, Bruyette & Woods Inc.
Mr. Davis said that B of A "clearly made a fundamental mistake evaluating the health of Merrill's balance sheet," largely because it cut the deal under rushed circumstances.
By comparison, he said, had JPMorgan Chase & Co. bought Washington Mutual Inc. in early 2008, instead of picking up its bank assets after it failed later last year, it would have bought a company whose assets would have steadily eroded over the course of the year, creating huge losses for JPM.
"That's not what happened, fortunately for JPMorgan, but that is essentially what's happening to B of A — market conditions are killing Merrill's assets," Mr. Davis said. B of A, "in playing good corporate citizen by doing this deal, has made a huge blunder. It's become a noose around their neck."
On a down day for bank stocks — the KBW Bank Index fell 8.04% — Citi was off 15.5% and Bank of America 18.4%. It was the second consecutive day that shares in both companies were hammered.
