It takes big cojones to invest in the US banking sector right now. Barely a week passes without another financial giant hitting the wall. The sector has been one of the worst hit this year.

But are there firms that will benefit from the wholesale restructuring of the industry? Money Map editor Horacio Marquez says Bank of America Corp. (NYSE:BAC) “will jump from merely being one of the largest banks in the world to being a commercial-and-investment banking powerhouse.”

Horacio recommends using short-term volatility to buy BAC shares on market dips to gradually build up a long-term position by the end of the year.

This from Horacio in Money Morning:

The U.S. financial-services sector is undergoing the broadest restructuring of a single industry in the history of Corporate America, and Bank of America Corp. (NYSE:BAC) has positioned itself to emerge as one of three clear front runners.

Indeed, along with Citigroup Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM), Bank of America could well emerge from this financial maelstrom as one of the premier players on the global stage: All three will benefit from increasing market share and increased financial intermediation margins as their weaker rivals have failed and/or been taken over in part or in total by a stronger industry player.

During the many financial crises that I have analyzed around the world, the result has always been the same: The prudently managed, under-levered institutions that did not overstretch their capital bases and that were able to maintain strong funding not only survived – they ran away with the market.

As unsavory as it sounds, the moral hazard argument of too-big-to-fail also helped them, even in the cases where risk taking had been excessive, as was true with American International Group Inc. (NYSE:AIG).

The huge benefit of being conservative – even boringly so during normal economic times – is that when the economy inevitably turns down, or when the periodic financial crisis strikes (as it has right now), these firms are among the few that actually have the capital available to cherry-pick the “crown jewel” assets of their now-foundering rivals.

Indeed, in the very worst of circumstances – such as the one the U.S. financial-services sector currently faces – strong firms actually are begged to swoop in and use their capital to buy up troubled assets, divisions or whole companies.

It helps immensely to have one of the largest deposit bases in the world, which generates dependable income on a daily basis, even during the worst of times. This is precisely the case of Bank of America.

On July 1, BofA snapped up the operations of dying mortgage leader Countrywide Financial Corp. Bank of America ended up paying only about $2.5 billion in Bank of America stock in a deal that had actually been announced back on Jan. 11. BofA had actually already invested $2 billion for a 16% stake in Countrywide.

Then came the weekend switcheroo. In a stunning turn of events back on Sept. 15, when investors were watching and waiting for Lehman Brothers Holdings Inc.’s (OTC:LEHMQ) possible acquisition by either Bank of America or Barclays PLC (NYSE:BCS), BofA instead emerged from the weekend announcing that it had struck a deal with Merrill Lynch & Co. Inc.’s (NYSE:MER) President and CEO John A. Thain. Realizing that the credit crisis had rendered moot the concept of the standalone investment bank, Thain avoided Lehman’s ultimate fate – bankruptcy – agreeing to be bought out by Bank of America. BofA’s Kenneth D. Lewis astutely took full advantage of the opportunity.

He got to acquire Merrill Lynch in an all-stock transaction for a 70% premium over a very depressed Merrill Lynch stock price at about 1.83 times tangible book value, or about $50 billion, less than a third of its own market capitalization. What’s more, when the transaction closes (probably in the first quarter of 2009), Bank of America will jump from $1.7 trillion in assets to about $2.7 trillion in assets, retaining a strong capitalization ratio.

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More on this topic (What's this?)

"Bankruptcy Puts" on Merrill (naked capitalism, 11/21/08)

Holy Crud! (Random Roger's Big Picture, 11/20/08)

Bank of America Buys Merrill For $29 a Share (naked capitalism, 9/14/08)

Read more on Bank of America at Wikinvest

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