Thain Forced Out, NY Attorney General Cuomo Investigating Merrill Bonuses

Bank of America CEO Ken Lewis gave former Merrill chief John Thain an unceremonious heave-ho earlier today, a mere month after the Merrill deal closed, after one too many nasty surprises: the deterioration of Merrill in the fourth quarter, the revelation that Merrill effectively stiffed BofA by paying bonuses early, thus depriving the bank of the opportunity to review the payments and ascertain whether they were appropriate.

The Wall Street Journal gives a tidy synopsis:

Bank of America had lost confidence in Mr. Thain….after Mr. Lewis learned of mounting fourth-quarter losses at Merrill from the transition team handling the Bank of America-Merrill merger rather than from Mr. Thain himself. And when Mr. Lewis asked Mr. Thain what happened, the Bank of America CEO did not get a “good explanation for what was happening and why,” this person said….

The Bank of America CEO also concluded Mr. Thain has exercised “poor judgment” on a number of fronts. He left for a vacation in Vail, Colo., after the losses came to light, bonus payments at Merrill were accelerated so they could be collected before the end of the year and Mr. Thain had planned to fly this week to Davos, Switzerland, even though Bank of America had signaled that such a trip was not a good idea, this person said.

And CNBC (with a slideshow) had a bit of fun chronicling some of Thain’s spending as Merrill CEO:

When John Thain became Merrill Lynch’s CEO in early 2008, he hired Michael S. Smith Design to revamp his office suite, spending approximately $1.22 million according to documents….

The following is a list of the items in his suite:

Area Rug $87,784
Mahogany Pedestal Table $25,713
19th Century Credenza $68,179
Pendant Light Furniture $19,751
4 Pairs of Curtains $28,091
Pair of Guest Chairs $87,784
George IV Chair $18,468
6 Wall Sconces $2,741
Parchment Waste Can $1,405
Roman Shade Fabric $10,967
Roman Shades $7,315
Coffee Table $5,852
Commode on Legs $35,115….

Thain also paid his driver $230,000 for one years work, which included the driver’s $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay, documents show. Drivers of top executives are often paid about half that amount.

Adding a bit of gas to this fire, New York State Attorney General is reported to be investigating the early payment of Merrill bonuses.

In the larger context, what does this mean? It was reasonable to guess that Thain would not have survived long even without pulling a few fast ones on his pending employer. Bank of America still has a traditional banking culture, and that has not done well with higher pay, more flexibly run acquistions (for instance, BofA lost many wealth managers and important clients when it acquired private bank US Trust, and private banking is not a terribly free-wheeling business). That isn’t to defend Thain, merely to point out that even under less questionable circumstances, he might not have lasted very long.

But is this move a sign of a sea change in attitudes towards CEO and senior level prerogatives? Sadly, I doubt it. Yes, the worst excesses may be reined in, but so much unjustifiable behavior came to be seen as acceptable by boards (with compensation consultants providing a paper trail to boot) that it will take a long time to effect more fundamental change. Did anyone object to Sandy Weill putting working fireplaces into his offices (a vastly greater expense than Thain’s decorating?) Did GE shareholders know of all of Jack Welch’s perks until they came out in his divorce?

But the noise about Thain’s compensation is probably less important than how it unintentionally serves to divert attention from the real issue. Many (all?) of the big players in the financial sector are insolvent, period. Their credit losses (whether marked to market or a realistic cash flow basis) are bigger than their net worth. These firms are therefore wards of the state.

Yet we keep pretending that they are still private concerns, still keep the managements in place that created the mess, still allow them to pay themselves orders of magnitude more than average workers. As we have discussed, this is looting and the looting continues.

Why, for instance, has no one raised the issue of accounting fraud? Lehman’s financial statements gave no hint that it had a over $100 billion hole in its balance sheet. Yet no one seems interested in pursuing the fraud line of thinking (save some unhapy shareholders) and one wonders whether Lehman was alone.

Financial firms took on massive leverage and with it, huge risk, to boost profits and the pay of staff and senior officers. Even the financial press was reporting that credit spreads were far too narrow (ie, those taking risk were not getting enough income in relationship to the likelihood of losses). But those in the best position to understand those risks kept piling them on, because it was a “heads I win, tails you lose” bet.

And Thain got kudos for selling Merrill to BofA at what turns out to have been an inflated price. The fact that this characterization is widely accepted says the public has been played for fools. Merrll’s shareholders should have been wiped out, and its bondholders should have taken a hit. Instead, Thain transferred Merrill dud assets to the public and was (until today) applauded.

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  1. Anonymous

    Cuomo, what has he ever done? And no, his father doesn’t count.

    Solution to prosecution, promote him to the senate where he can vote with the rest of them to override the house and give the banks 700 billion.

  2. Anonymous

    Do you hope your children shall be kings,
    When those that gave the Thain of Cawdor to me
    Promis’d no less to them?

  3. Les Digits

    Couldn’t he at least have gotten a cheaper commode on legs? I know ours didn’t cost that much.

  4. Anonymous

    I suggest before closing Guantanamo, we transfer Mr. Thain there and put him through a few months of “gentler, kinder” waterboarding to find out exactly why did he buy the $35,115 Commode on Legs over the $49.95 version from Walmart. However, it is important he shares his cell with Madoff and serve as his “bitch.”

    Vinny Goldberg,
    (Wiz Kid, Maverick, and Maestro of all sorts of economic theory, research, and practice)

  5. DanyBoy

    The fiefdom of Merrill has seen its last days.

    I have always maintained that Merrill was the most cynical, corrupt and shameless of the formerly Wall Street Ibanks.

    They have never Ever never let me down!

  6. bg

    “Thain got kudos for selling Merrill to BofA at what turns out to have been an inflated price”

    Madoff got similar kudos.

    We now know what we previously knew, that IB were less than honest brokers.

    What is ironic to me, is that the stack racking has always been: Goldman, Morgan, Merrill, Lehman, Bear. But we more most reviling the CEO’s of Lehman and Merrill. How did Bear get out of Jail?

    My only consolation is that it took a while to jail the CEO’s after the last round of crashing bubbles. My major counter consolation is the regulatory capture which was not present the last time around.

  7. doc holiday

    Speaking of $50,000 gold toilet seats, the foul smell of CEO’s and fraud is getting stronger every day; one can pray or hope that Obama will stand up for American justice, versus sit on a golden throne and ignore all this feces:

    FYI: Federal authorities indicted Ebbers with security fraud and conspiracy charges on March 2, 2004.[9][18] An amendment to the indictment on May 25, 2004 increased the list of charges to nine felonies: one count each of conspiracy and securities fraud, and seven counts of filing false statements with securities regulators. Ebbers was found guilty of all charges on March 15, 2005. On July 13, 2005, federal judge Barbara Jones, of the U.S. District Court, Southern District of New York in Manhattan, sentenced Ebbers to twenty-five years in a federal prison in Louisiana, the toughest sentence yet among other recent corporate accounting scandals.

  8. bobn

    after one too many nasty surprises: the deterioration of Merrill

    Ken Lewis is a f’ing idiot. What else in the world did he expect?

  9. doc holiday

    I guess I’m just a dumb bozo moron — but I see no difference at all between the fraud from Ebbers and that which we currently see from all these crooks currently waltzing around wall street today:

    FYI: The fraud intensified over time as Sullivan, urged by Ebbers, started using increasingly aggressive accounting “adjustments” to meet investor expectations. The process intensified with more one-time items being selected to fill the gap between expected revenue and actual revenue. Later, the company began cutting reported expenses by capitalizing “line costs”–money WorldCom paid to other telephone companies to rent their lines–by treating them as capital expenditures rather than as ongoing expenses.

    Normal “earnings management” slid into fraud. As operations worsened, the fraud increased. Ebbers didn’t get into the accounting details and testified he did not understand them, but he would reiterate to Sullivan the importance of “making the numbers.” This order made him responsible for the fraud and a criminal, the jury found.

  10. Anonymous

    Why has no one raised the issue of accounting fraud?


    Because, it would completely upset the current “standards” of revenue recognition for ALL financial institutions, not just the failed ones.

    It would make it obvious that nearly all profits were a fabrication based on the blissful ignorance and lack of adequate provisioning of the risk pile-up that made all those shiny short-term profits possible (and the nice bonuses that came along).

    A banker will never call out that fraud. Nagganahappen. No way.

    It will have to come from outside, it it ever does.

  11. ronin

    So Thain is pond scum. But when Lewis was informed of the depth of the losses at Merrill, he still did the deal- with bailouts from the government, of course. He wanted to do a deal to get an investment bank- and when it was apparent Lehman was walking dead, he turned to the supposedly better Merrill. And in doing so ruined the bank and destroyed shareholder value.
    I suspect with all the hoopla about Thain, this truth will be ignored. Will Lewis survive his epic FAIL?

  12. Anonymous

    WTF!!!!! I am ashamed of being in the finance industry. What kind of person does something like that? I don’t know if anyone knows this but $1.2m is a lot of money. I am speechless and outraged. Good night all, I have to go take a shower, ughh.

  13. Sion

    Do these guys know that in the world about 2.5 billion people live on less than $US2 per day. 2.5 Billion….

    We know that what people achieve in their lives is due 90% to chance and 10% to ability.

    We need to cast the net more widely when it comes to bank CEO’s.

    I mean really the parallels between the princes of banking and the French aristocracy before the revolution could not be more profound.

    I think all senior business people should look towards China to see what can happen when corruption is prosecuted amid hightened political tension.

  14. dd

    Once the SEC was re-vamped from an investor protection agency to a management protection agency it was over. That happened when the SEC started extracting corporate fines that punished investors twice rather than the usual disgorgement that was re-directed to shareholders.
    The fines were a brilliant tactic that took the heat off the SEC to sue management as it made the agency appear to “punish” bad corporations, funded the Treasury’s coffers, and allowed management to remain safe and secure via “not admitting or denying” the frauds and settling the case to “avoid litigation costs.”
    That was when it became apparent that shareholders were not “owners” but merely unsecured claimants to a dwindling revenue stream of uncertain longevity.

  15. Anonymous

    This is a great example of the failings of the ib’s in the last cycle. $1.22mm in decoration assets on the b/s as/at 12/31, what’s the value of them now? whatever the markdown is, adjust your equity value in bac by the same.

    given what the assets were used for, that’s a kick right in the n”($ for shareholders, don’t you think?

  16. cap vandal

    But the noise about Thain’s compensation is probably less important than how it unintentionally serves to divert attention from the real issue.

    BAC is trying to divert attention away from its own problems. It booked a sizable loss excluding MER.

    It obviously isn’t working out for Ken Lewis, but he has to love the fact that public opinion is turning heavily against MER.

    The public is also have problems dealing with the order of magnitude regarding what’s going on. If I had $10,000 in cash and gave someone a $1 tip, it would seem trivial. For every dollar wasted on that office, $40,000 in bailout money has been used for MER.

    It’s a sideshow.

  17. doc holiday

    I’m busting my ass looking for a parchment waste can anywhere on the net and nothing — thus, I can relate to this CEO-dude here in wanting something so rare to be near him (within reach and close enough to toss handfuls of burning cash) as he ponders retarded dart tosses, that any monkey could have have made with a blindfold, or a match?

    Nonetheless, this is as close as I got to parchment and the smell of moolah: parchment

  18. doc holiday

    Now wait just a damn second … now I can’t find anything that looks like: Pendant Light Furniture

    Huh? This dude is obviously scum, but what about a grassy knoll theory that this scum didn’t buy any of this trash and he simply ripped off the cash and falsified records?

    I know, that seems dumb, but I trust these people less than someone like Al Capone — who at least, on his business card reportedly described himself as a used furniture dealer, thus, I wouldn’t doubt for a second that this decorating story is fabricated, for what ever reason. If it is true, in any way, Thain is a retard for watching all the fluffy crap go on right under his retarded watch, so why is he innocent versus guilty?

    Ok, I feel better now…

  19. Anonymous

    I remember reading at the time the merger deal was announced that there was a provision in the merger agreement that if Thain and Tom Montag did not find suitable positions at the merged entity they would be paid 57 million. Does this dismissal involve that clause?


  20. Richard Smith

    Am naively astonished how frivolously Thain treated his hard-won reputation. I suppose he may have known that he didn’t really deserve it.

  21. fresno dan

    “Yet we keep pretending that they are still private concerns, still keep the managements in place that created the mess, still allow them to pay themselves orders of magnitude more than average workers. As we have discussed, this is looting and the looting continues” Yves said.

    You know, as stupid as I am, I bet if I had run any of these banks they wouldn’t be bankrupt. But being naive and foolish, I would have been concerned that when I lend money that I get it back. And it would have meant that short term profits were not rising at a rate that “wallstreet” demands. Supposedly, the stock market is “dollar democracy” rewarding competance, effort, and inovation. Yet disconcertingly, the reality does not come close to matching the theory.
    I wonder how many government policies we get that we demand that are “popular” but are detrimental to our long term benefit.

  22. bena gyerek

    so to state the obvious, thain already knew pre-takeover that merrill was insolvent, fudged the accounts in 3q08, courted and won the boa takeover, allowed losses to crystalise in 4q08 once the takeover was consummated, knew he and all his merrill pals would get the boot once the losses were revealed, took a holiday, and got him and his pals paid handsomely ahead of their inevitable enforced career change.

    i can just imagine him up on the slopes by davos, answering an unexpected call from that poor sap ken lewis, telling him everything’s fine and to take it easy, turning his phone off and then shooting off down the slope enjoying his (as yet unofficial) early retirement.

    the sad truth is that thain’s main motivation for this kind of behaviour is not money per se, but his desire to win the praise of his (narrowly defined) peers. stiffing boa and getting away with it would have been a big thrill because he knew that everyone else in the investment banking world would secretly envy his shrewdness.

  23. Anonymous

    Who authenticated Thain’s “George IV Chair $18,468”? The antique and “art” world are full of frauds and fakes, no wonder the Banksters love collecting the stuff. Just one example:

    Of course, since we run a Wealth Up economy, we all pay for this fascination for antiques, art, wine and all the finer things. I would imagine a Rich Person’s Inflation Index would show massive inflation in the finer things over the past decades and we, the little folk, pay for it, not them. Start with all their Tax Cuts.

  24. Anonymous

    “Yet no one seems interested in pursuing the fraud line of thinking (save some unhapy shareholders)”

    Aren’t we all sharholders now?

  25. Anonymous

    There needs to be a legal remedy that will make CEOs think twice about doing such foolish things with public money. I suggest immediate restitution of all Merrill TARP funds. Let Thain pay for his extravagances out of his own pocket, not ours. And make Merill execs pay back all bonuses.

  26. HLS

    After the Countrywide acquisition Lewis should have known better. The due diligence in both the CFC and MER acquisitions was truly horrendous. There was talk for a long time that Merrill was looking to be acquired. Lewis should have known Thain would come knocking on his door.

    Lewis should be fired.

  27. ruetheday

    So within 1 months time, we basically have a $20 billion bailout to BAC, an unexpected $15 billion loss by Merrill, and $15 billion in Merrill bonuses paid out ahead of schedule despite a horrible year. This is theft, plain and simple.

  28. Anonymous

    Thain’s looting of Merrill shareholders before the acquisition closed is COMMON, SCUMMY PRACTICE of Wall Street firms being bought out. I was a beneficiary of this as a DLJ employee in the days before it was acquired by CS.

    And for Lewis not to know enough to prevent this proves for the 100th time he’s a total idiot.

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