Bank of America Corp Chief Executive Kenneth Lewis told investors in September he was pleased to acquire Merrill Lynch & Co's world-class investment bank -- but as losses there mount, he may just let that key part of its business wither.

Now that the government has a taken a large stake in the Charlotte, North Carolina-based bank, investment banking may not be as attractive.

Regulatory requirements are going to dramatically reduce the amount of risk that Bank of America is allowed to take, said Jaime Peters, an analyst at Morningstar Inc in Chicago.

Risk-taking is central to proprietary trading and helped drive the large profits at banks, including Merrill, in recent years.

Since Bank of America is an at least partly nationalized entity, the risks and the capital required to operate a gigantic bulge-bracket (investment) bank may be viewed with disfavor by the largest stockholder -- now Uncle Sam, said George Ball, chairman of the Sanders Morris Harris Group in Houston, an investment firm with about $8.6 billion in assets.

B of A, which paid more for Merrill than the bank's current entire market capitalization, is now more attracted to wealth management, Merrill's other large business, which is less capital intensive than investment banking because it does not involve lending to finance deals and companies.

Lewis' new found interest in investment banking surprised some who remembered his famous statement in October 2007 that he had had all the fun I can stand in investment banking.

And as Bank of America looks to recover after reporting its first quarterly loss in 17 years and taking a total of $45 billion in government funds since October, the investment bank may be an easy target for cost-cutting.

The company said in December it plans to cut up to 35,000 jobs -- or as much as 11.4 percent of its employees, including former Merrill staff -- over three years.

The investment bank is expected to see many of the cuts as business there is slowing, analysts said.

They're making some fairly extensive cuts and in addition you would expect other businesses would bounce back quite a bit, said Peters.

Over the long term, she expects investment banking to contribute just 10 percent to 15 percent of the bank's revenues.

That is less than half the 32 percent Bank of America had estimated in a September presentation to investors, which was based on figures from the first half of 2008.

We are happy with the investment banking platform and people we acquired from Merrill Lynch, said Bank of America spokesman Scott Silvestri. People from both former Merrill and former Bank of America have already worked together on a number of projects that will be quite lucrative to our company and we look forward to even greater opportunity as we formally put the platforms together.

A GOOD JANUARY

For now, the largest U.S. bank dominates the debt and equity capital markets since it acquired Merrill and in a recent interview with CNBC, Lewis said it had a pretty good January in terms of customer flows.

We continue to be very happy that we own Merrill Lynch, Lewis said in the interview.

But analysts questioned the support that Bank of America executives have for the investment banking business.

Combined with the departure of key Merrill executives, including former Chief Executive John Thain, a dearth of support within B of A may lead to an exodus of talented executives, including some of those responsible for getting the bank to the top of the debt and equity capital markets, analysts said.

I don't think there's going to be any overt expunging of the unit, but I think it may be a person-by-person repotting into boutique firms or other companies, said Ball.

And then of course there's the fact that, when he announced the takeover in happier times, Lewis called Merrill's 16,600 army of financial advisers -- not the investment bank -- its crown jewel.

Certainly the focus of Bank of America in buying Merrill was not investment banking, said David Dietze, chief investment officer of Point View Financial Services in Summit, New Jersey.

(Editing by Andre Grenon)

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