The Wall Street Journal ran a front-page story about John Thain yesterday in which he accuses Bank of America (NYSE:BAC) CEO Ken Lewis of lying about events surrounding the Bank of America - Merrill transaction and the ouster of Thain as a top Bank of America executive. Thain spent most of his career at Goldman Sachs (NYSE:GS), but left to head the New York Stock Exchange when he was passed over at Goldman in 2003.
The key issue as far as John Thain is concerned has to do with the bonuses paid out to Merrill Lynch executives. Ken Lewis says he was apoplectic that these bonuses were paid when Merrill lost $15 billion.
But Mr. Thain says that he and Bank of America Chief Executive Kenneth Lewis agreed in writing that the bonuses could be paid before Bank of America's acquisition of Merrill closed, which led to the early payments. "The suggestion Bank of America was not heavily involved in this process, and that I alone made these decisions, is simply not true," he says.
Bank of America has painted a different picture than Mr. Thain's of critical decisions that were made last fall. It has cast him as the person responsible for distributing billions of dollars of bonus money despite Merrill's huge losses. Before Mr. Thain's recent discussions with the Journal, he had refrained from commenting in depth.
Edward here. Honestly, Ken Lewis does not have a lot of credibility here after details of a February deposition were revealed last week. In that deposition, Lewis admitted to consummating the merger with Merrill Lynch despite his own misgivings about the deal, apparently because his job was on the line. So we have to take Lewis' statements with this in mind.
The Wall Street Journal article continues later with this:
According to the merger documents, many other compensation decisions at Merrill were to be made "in consultation" with Bank of America officials. Bank of America approved paying a portion of the bonuses in Bank of America stock and was involved in setting compensation for a number of Merrill executives, people involved in the matter say.
Within days of the takeover announcement, Bank of America's transition team arrived at Merrill to begin figuring out how to combine the two companies. About 200 employees set up on one floor of Merrill's headquarters, and Bank of America Chief Accounting Officer Neil Cotty moved into an office on the 32nd floor.
The group became involved in nearly every aspect of Merrill's operations, with dozens of Bank of America employees tracking Merrill's financial condition on a daily basis, according to people who work at the firm.
In October, Bank of America announced that Mr. Thain had agreed to become president of the combined company's global banking, securities and wealth-management business once the acquisition was completed. A bank spokesman said there had been "no commitment about succession in Mr. Thain's decision to stay."
Mr. Thain says that in late September, over a dinner in Charlotte, Mr. Lewis told him he was the only real candidate in line to succeed him.
By the end of November, Merrill's losses were ballooning because of deteriorating market conditions and write-downs on various mortgage-related investments. Still, the daily emails sent to executives at both companies summarizing the deal's status said "status green," according to Mr. Thain, signaling that the takeover was on track.
In early December, the compensation committee of Merrill's board agreed to a bonus pool of $3.62 billion. On Dec. 11, Bank of America asked Merrill to increase the amount of cash to 70%, according to a letter reviewed by the Journal. The two companies agreed that the stock portion of Merrill's bonuses would be paid in early January. Mr. Thain says the documents prove that Bank of America was actively involved in compensation decisions.
Some Bank of America executives have said that Mr. Lewis lost confidence in Mr. Thain when Mr. Lewis learned of the losses from the transition team. Mr. Lewis flew to Washington on Dec. 17 to tell federal regulators that he was considering abandoning the takeover. Two days later, Mr. Thain left for vacation in Vail, Colo., unaware that the regulatory showdown had happened. Messrs. Thain and Lewis both have said that Mr. Thain didn't find out until Jan. 5.
What transpired is not entirely clear, but the following is a potential course of events:
- John Thain sees Merrill Lynch on the verge of failure on the weekend of Lehman's demise and rings Ken Lewis, a man he hardly knows - after all Bank of America is not really a creature of Wall Street. John Thain and Merrill Lynch are.
- Thain wants to strike a deal - one that the Feds (read Paulson, Bernanke and Geithner) - facilitate (See Fed Chair Hoenig's off-the-cuff remarks about this, which I first mentioned in March).
- Later, the banking industry gets hammered. Anyone with a large prop desk (Goldman, Merrill, Deutsche (NYSE:DB), Morgan Stanley (NYSE:MS)) suffers huge losses. Merrill is one of the worst hit.
- Now, remember Bank of America is NOT a Wall Street firm. They are based in Charlotte. They are a regional commercial bank (BofA is really Nations Bank/NCNB) with a very different culture to the likes of Merrill. So they probably were shocked by the losses here - which I imagine they were kept abreast of on an ongoing basis. In March, The FT has said BofA knew how Merrill's books were being marked.
- The next part is tricky. Did Lewis, a deal hound if there ever was one, want to back out at this point? My gut says no. Were they going to pay big bonuses to retain personnel at Merrill? Yes! Remember, they had just paid a monster $44 billion for Merrills. They were not about to let the deal founder on a one-off bonus round.
- Things changed somehow by December as the losses mounted. And I suspect there was a real culture clash as well. Thain and Lewis started to get to know one another and it was not working. From my perspective, it is irrelevant what really happened in December between Thain and Lewis.
- What is relevant is that Lewis and the board of directors of Bank of America allowed the Merrill Lynch transaction to take place knowing that huge bonuses had been paid out and huge losses had been sustained - making the Merrill franchise considerably weaker than it was in September. The MAC clause is completely valid as a reason to pull out or change the terms of the deal. This is what I argued in a post yesterday about Lewis.
- Because BofA did not change the deal terms and was subsequently bailed out, we can only believe that there was a nod-and-wink deal made with Bernanke and Paulson that more funds would be coming to bolster BofA's worsening balance sheet as the stock price cratered.
At the end of the day, none of this is beneficial to Bank of America shareholders, who have seen their shares fall from over $50 per share to as low as $3 before rebounding to over $10. They now trade for $9.10.
Just think back, before the Countrywide and Merrill acquisitions, Ken Lewis could have claimed to be a rival for king of the hill to JPMorgan CEO Jamie Dimon, who now touts his firm's 'fortress' balance sheet. But, after two disastrous mergers, Bank of America is a shambles. The real losers in this he-said she-said saga of corporate executives managers and regulations are the owners of the business, the shareholders.
And yet, John Thain is the only one to have lost his job.
Disclosure: I have no financial positions in any of the banks mentioned in this article.