Originally posted on Credit where it's due:
Merrill Lynch is now an unguaranteed subsidiary of Bank of Merrill Lynch. While everyone seems to have understood the subsidiary apect of this, a lot less focus has been placed on the unguaranteed part.
Merrill Lynch is a capitals market bank, with very little in the way of deposits and little in the way of divergence of investments from trade related businesses; Bank of America on the other hand is a universal bank, cash deposits make up around 50% of its consolidated liabilities, has a much wider source of funding and assets. It also does not fully guarantee the debts of Merrill Lynch.
But at the moment CDS on these two banks are trading almost in tandem, with only 21 bps between their five year spreads. Especially during negative macro conditions, you have to expect these spreads to diverge.