When Bank of America announced its deal to acquire Merrill Lynch in mid-September, we noted in this space that we were skeptical. Based on the research for our book, we thought Bank of America was making a classic mistake: focusing so much on the benefits of an acquisition that it glossed over the potential problems. Merrill seemed to be fraught with potential problems–and they are now coming into painfully clear focus

For example, a recent Wall Street Journal article points out that Bank of America’s offer was for 1.8 times Merrill’s tangible book value, a commonly used measure of net worth that strips out intangible assets such as goodwill. Yet Goldman Sachs now trades around just 0.8 times tangible book value, and Morgan Stanley trades at around 0.4 times tangible book value, even though both are healthier than Merrill Lynch. As the Journal notes,  “It looks like BofA overpaid.”

The same Wall Street Journal article notes that Merrill could face even more problems because of its investments in toxic mortgage-related assets. Merrill retains mortgage-related assets equivalent to 207% of tangible equity, versus 88% for Morgan Stanley and 55% for Goldman. It had seemed for a while that the $700 billion bailout would reduce the fallout for Merrill from its $64 billion of so-called Level III assets, which are mortgage-related and other assets so tainted that they could not be priced because no one would bid for them.  But the risk now reasserts itself given that the Treasury department is no longer going to buy such assets.

Trouble also appears to be brewing with the integration of Merrill’s coveted brokerage business into BofA.  Another WSJ article reports that there is a culture clash developing between the BofA and Merrill brokerage folks. The Merrill side thinks the BofA folks are rubes who wear cheap clothes and have flag pins in their lapels. The article suggests that the good Merrill brokers may jump ship.

Again, this sort of culture clash is a classic problem and could have been anticipated. But BofA chose to gloss over the issue in its heated pursuit of Merrill. So BofA may pay a heavy price.