The deal comes as bankers and regulators met in New York to figure out whether to rescue Lehman Brothers, and if so, how. Those talks seemed increasingly likely to result in Lehman's liquidation.
A Merrill Lynch spokeswoman declined comment and a Bank of America spokesman could not immediately be reached for comment.
Merrill, stuck with some of the same toxic debt -- much of it mortgage-related -- which torpedoed Lehman's balance sheet, has been hit hard by the credit crisis and has written down more than $US40 billion ($48.6 billion) over the last year.
Last month, Merrill chief executive John Thain arranged to sell over $US30 billion in repackaged debt securities to Dallas-based private equity firm Lone Star Funds.
"I'm surprised that Merrill Lynch would want to sell at this point," said Bill Fitzpatrick, an analyst at Optique Capital in Milwaukee.
"They seem to be taking steps to improve their business. They have sold off a lot of their toxic assets. Merrill seems to be progressing to me."
In spite of these exposures, the bank is seen by some as undervalued, in part because of its massive brokerage business, which analysts have said is worth more than $US25 billion. The brokerage is the largest in the world by assets under management and number of brokers.
Merrill also has about a 45 per cent stake in the profitable asset manager BlackRock, worth more than $US10 billion.
"It could be a powerful fit," said Rick Meckler, chief investment officer at LibertyView Capital Management in New York. But he added: "Merrill Lynch has significant exposures and Bank of America would need enough balance sheet to handle that."
Due diligence
Meckler also noted that the due diligence Bank of America would need to do on Merrill's books would be a serious undertaking, given the complexity of the company's exposure to mortgage-related securities and other complex debt.
With the brokerage and the BlackRock shares worth more than $US35 billion combined, and Merrill's market capitalisation at around $US26 billion, investors are ascribing a negative value to the investment bank, implying huge potential embedded losses.
On the other hand, it would not be the first time Bank of America has done a quick acquisition. In 2005, the bank bought credit card company MBNA after less than a week of due diligence, with Mr Lewis saying the company was comfortable with the acquisition because it knew the people and business well.
Bank of America under Lewis has in fact become renowned for large acquisitions and it has spent over $US100 billion since 2004 buying other companies.
Most recently it acquired troubled mortgage lender Countrywide and -- although many were skeptical about this purchase -- veteran analyst Dick Bove said last week the takeover could prove to be a master stroke by Mr Lewis, since the government takeover of mortgage agencies Fannie Mae and Freddie Mac could fuel business for other lenders.
CBA to buy a third of Aussie Home Loans
Investor Report: Cash for Future Equity
Washington Report: What if Fannie and Freddie Need Capital Infusions?
