In addition to providing yet another testament to the pervasive lack of risk-based transparency in finance, the Bank of America/Merrill Lynch transaction has yet again demonstrated the profound disconnect between executive decisions and risk management. Consider the rationale behind the transaction, according to Bank of America’s CEO Ken Lewis: “This was almost a perfect fit, and we thought it was close enough to the bottom that we could make the deal work and be very good for our shareholders.” Notice the following important feature: while the focus was placed on business synergies and strategic objectives, as usual, risk management appears to be an afterthought, loosely alluded to not even in risk management terms but rather in terms of timing the market (“we thought it was close enough to the bottom”). Needless to say, when risk exposures inherent in the transaction surfaced a few months later, the deal no longer appeared “a perfect fit.” In fact, the latest estimates suggest that BoA will be facing Merrill Lynch-related losses for the next several quarters. The same balance sheet risks are also likely to have a dilutive impact on BoA’s earnings for the next two years.

Aren’t there interesting parallels here with the lethal impact of Golden West on Wachovia?