The Spread Between "Schrodinger's Goose" - Merrill, And Bank Of America Soars To 2009 Highs

Tyler Durden's picture

Following the recent surge in blue light special asset dispositions courtesy of Bank of America's precarious liquidity conditions, many have speculated that the bank will be forced to sell none other than Schrodinger's Goose: Merrill Lynch, which is at the same time both dead (pre bailout) and golden (due to some legacy reputation it has as a fabled Wall Street firm, now mostly based on intangible value). Nowhere else is this more evident than in the CDS spread between the two entities. After trading at close to convergence for about a year, the CDS levels between the two entities have seen a dramatic dispersion in recent days, soaring to over 50 bps (BAC CDS at 340, ML at 394). This is the widest the spread has been since early 2009 when the world was ending and everyone was buying whatever CDS they could get their hands on. The only comparable widening was in May 2010 when Europe blew up for the first time. So what should one do here? A divergence trade would mean that BAC is going to deteriorate so much it will have no choice but to dump Merrill, an outcome which will likely see both spreads blow out to 2008 wides, only to be followed by the need to nationalize CFC which will likely mean a collapse in Countrywide Home Loans spread (as we hypothesized two weeks ago). As if that was not confusing enough, the likely future of standalone BAC CDS post this event will likely be a tightening as the bank spins off its most toxic division, but then widens as the realization that America's biggest depository is no longer TBTF and spin offs are imminent. That... or the divergence collapses as the BAC blow out continues while investors speculate that upon its sale Merrill will have less risk than its old parent. In either case, keep an eye on this spread as it could be the canary in the coalmine for what BAC management plans to do w/r/t the Schrodinger Goose, CFC, and overall future business as a going concern expectations.

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Herd Redirection Committee's picture

Check out the latest from the Capital Research Institute "Debt Crisis? Or Currency Crisis?":

"The realization that developed economies are not recovering has in turn been compounded with the fear that governments will rein in their spending, further accelerating the economic decline.  Add Options Expiration Week, High Frequency Trading, and tremendous leverage to the mix and equities markets experience extreme volatility like yesterday (August 18th, 2011).

But fundamentally the same game is still being played.  Japan, Europe and the US all plan to continue devaluing their currencies.  The beauty is this.  Their exchange rates relative to each other will stay fairly close to what they currently are, which facilitates trade, and keeps the average person oblivious to what is happening.  Until the cost of groceries and utilities go up, any way!  Purchasing power will decrease for all who have stagnant wages (almost everyone).  And to top it all off, the respective countries can all blame each other for devaluing their currency.  “You did it first.  We had no choice!”

Ultimately, more stimulus will be announced, but not until new names for it have been propagandized.

Gold will probably take a breather and could even correct 10% over the coming weeks, but gold mining stocks have barely moved as the barbarous relic surged..."

LawsofPhysics's picture

Well, that is how I am hedged anyway.  People always need fuel, food, and water, period.

redpill's picture

I think it's high time for a good old fashioned bank run.

Fedophile's picture

Withdraw all your FRNs and laugh all the way to the mattres.

Zero Govt's picture

laugh all the way to the Gold & Silver coin shop you mean ..don't be holding those FRN's any longer than necessary, Benny has grand designs on torching them and he's doing a good job so far!   

HL Shancken's picture

Bears, you have this market by the throat. It's time to squeeze or be squeezed.

SheepDog-One's picture

Like 2008, the bankers will dump the market when THEY want it dumped. Only problem is this time theyre all out of snappy comebacks and quick fixes, other than seizing 401K's and pensions and accounts due to the sudden totaly unforeseen national economic emergency.

slaughterer's picture

BAC had 2 years to get their shit together and failed.  But answer me this Tyler: who the fuck WANTS Merill?  

Steaming_Wookie_Doo's picture

Only if it's properly "deodorized", i.e. guarantees and safeguards are put in by the gubbermint. Someone would want that bunch of acct holders, just not any stank-assets they may have in their possession. Did anyone really want WaMu or Wachovia until things got tweaked?

Zero Govt's picture

has anyone worked out the US Govt back-stopping a Merril Lynch sale is about as 'substantial' as the promise on Benny Bucks? What with being lender of last resort on US mortgages, Fanny and Freddie, US Banks and bank deposits the mighty broke US Govt looks even more broke by the day (is it even possible to be broke more than once over because we've already passed that point!) 

EvlTheCat's picture

A strange game. The only winning move is not to play. How about a nice game of chess?

SheepDog-One's picture

Or global thermonuclear war?

EvlTheCat's picture

Now, children, come on over here. I'm going to tell you a bedtime story. Are you sitting comfortably? Then I'll begin. Once upon a time, there lived a magnificent race of animals that dominated the world through age after age. They ran, they swam, and they fought and they flew, until suddenly, quite recently, they disappeared. Nature just gave up and started again. We weren't even apes then. We were just these smart little rodents hiding in the rocks. And when we go, nature will start over. With the bees, probably. Nature knows when to give up, David.

SheepDog-One's picture

Who's proper fucked now then?

JW n FL's picture

The FED is Paying those Pussies over at PIMPCO in Reality Checks!

gwar5's picture


Merrill Lynch is also shielded from decoherence like Schrodinger's cat.

hamster wheel's picture

Decoherence; funny how quantum physics can come so close to explaining modern economics.

Now, when Ben and Timmy have to sneak a peak into the goose's box...

WmMcK's picture

Heisenberg's Uncertainity Principle may apply.

Zero Govt's picture


is that the Principle that every Goose could in fact be a Turkey?

Seasmoke's picture

why are will still dealing with the fucking Angelo Mozillo and John Thain gave Ken Lewis ?

monopoly's picture

We are so way oversold I am really afraid to short here. Many of us are waiting for a jump to 1,200+ on spoos before we short. We may be left out.

And of course gold will correct. But to compare this to the Tech bubble of 2000 is absurd. This is not about non-existent PEs, unlimited growth on a prayer, this is about solvency of countries, loss of faith in a fiat system and the constant killing of currencies.

There is no comparison. And, I will buy more physical when we correct. Remember from these levels a 10% correction, which is normal, is about $150.00. That will seem like a lot to the idiots on bubblevision, but just part of the process. This will be going on for a long, long time.

SheepDog-One's picture

'Oversold' by what measure? Still being 50% overvalued in everything? I never did pay the least bit of attention to the oversold/overbought line its rear view mirror and means nothing at all far as Ive ever been able to deduce. When does a robot get tired of buying or selling?

Fedophile's picture

Until the market hits a PE of 7, it's overbought.

treemagnet's picture

It couldn't happen to a nicer bunch of cocksuckers.

Irish66's picture

Oh Citi has new issues

apberusdisvet's picture

Rumor has it that WFC to charge customers $3 per debit card transaction.  Watch the run on this bank.

Irish66's picture

Closed my account yesterday

FEDbuster's picture

It's $3. / month, if you use the card once or a hundred times.  We closed three accounts there over the past year.  My youngest son still has one there, he will close his next week.

Stoploss's picture

The RUT has slipped under the weekly 200 day, finally.

Captain Obviousness's picture

LOL at end of day ramp in BAC - they almost got it back to 7 but not quite.

max2205's picture

Does anyone here actually think banks are due a look after 2007 to now. Nothing has changed except it's WORSE? Seriously, comments?

prophet's picture

Free MER forces making a surge.  Fortune recent flattering article about BAC.  Watch BLK here too.  Old connections.  CEO says too embedded to spin off (means opposite).  Duck Duck Goose.  

Yen Cross's picture

 Didn't Bank of Bernanke announce laying off another 3,000?

oogs66's picture

i think bac may actually be smart for a change...i think their biggest aig lawsuits in particular at at MER.  They have been shifting assets out of MER.  They will let MER fight and possibly lose, and then bankrupt them, but AIG and others won't be able to go after BAC.  They will just have a stripped down MER carcass to munch on.  Ugh, that is a terrible image on a Friday night.

goldinpenguin's picture

NOBODY will buy MER if they have a lot of lawsuits ongoing. Maybe BAC could create a Good Merrill and a Bad Merrill and spin off the bad Merrill and let them sink under the weight of the lawsuits and then try to find a buyer for Good Merrill Brokerage only selling a brokerage in these conditions won't get top dollar.


MEER bought a handful of loser mortgage banks at the height of the bubble and then supposed got rid of the problem real estate paper but I bet there's still plenty that turned from good paper to bad the past couple years , we'll see.


It's looking like BAC will end up divesting at enormous cost their two marquee acquistions, the question is if they have any equity left after they take their lumps on Merrill & Cuntrywide. BAC euro exposure could be a kicker too.$7 is a wildly optimistic bet.

Mister Minsk's picture

BAC is a filthy parasite

Eugend66's picture

God, may I .... only this one time ... PLEASE, let the rotten mfkers FAIL !

Disclaimer: I`m new to both prayers and ZH.


Tunga's picture

"I wonder if anybody'd think I'd flipped if I went to Jackson Hole via Omaha." - Benny and the Jets

"This allows only rear-aspect engagement of jet targets, earning the weapon its other moniker as a revenge weapon, since the missile has to "chase" an aircraft after it has already passed by." - snip from wiki link above

"I know everything you don't want me to." - Poison and Wine - The Civil Wars 

Tater Salad's picture

MER would fetch 50B if IPO'd.  They bring 2B per quarter in Revs, you kidding me, what idiot thinks "no one would buy them?".  If you think that, you're f'n brain dead.  They also fetch 22%+ pre tax margins, easily and deliver continually. 

BAC will dump the bull to shore up some green, they need it to keep breathing another few months.  MER is carrying the wagon right now, almost single handidly!