2009-01-28

Thain called to testify on Merrill bonuses

Following the series of events of last week in reverse order:
It appears that John Thain has been issued a subpoena to testify in court.

This could get interesting and we might be facing various exiting endings (my interpretation/opinion):
  • If the management of BofA really knew what was going on, they might lose their job and face the same public humiliation as Thain.
  • If the Fed was really behind the merger of BofA with Merrill as I suggested before, they might try to force Thain to be a scapegoat to protect themselves.
  • In which case, Thain might decide he doesn't want to go under alone, and will try to take down as many of these corrupt people with him as he can. This story would hence become a really big deal in the US and around the world.
  • If it is that big a deal as mentioned in the previous point, they will do their best not make it public and save the face of the Establishment and of the United States by forgetting the whole thing and settling it with a no ground for prosecution. (My best guess is that we'll end up here...)
Here's the FT report:
John Thain has been issued a subpoena to testify about Merrill Lynch’s accelerated payment of bonuses last month, when his firm doled out close to $4bn in incentive pay, in spite of posting losses of $27bn for the year.

Merrill paid the bonuses even as Bank of America was asking the US government for an additional $20bn in Tarp money to complete its acquisition of the troubled investment bank.

The subpoena, issued on Tuesday by Andrew Cuomo, New York attorney-general, takes the dispute between Mr Thain and top management at BofA to a new level, with potential legal exposure for both parties. Mr Cuomo also issued a subpoena to J. Steele Alphin, BofA’s chief administrative officer, who is said to have had several discussions with Mr Thain about the bonus payments in late November and early December.

The accelerated bonus payments were first disclosed by the Financial Times last Thursday, the same day Mr Thain was dismissed by BofA chief executive Ken Lewis. At the time, BofA said it was Mr Thain’s decision to pay the bonuses.

Since then, in a memo to Merrill Lynch staffers and in an interview on CNBC Monday, Mr Thain has said that BofA knew about the bonus payments and even recommended changes in their cash-and-stock mix. BofA told the FT on Sunday that “we never said we didn’t talk” about the bonus payments, just that Merrill, as an independent company, was responsible for its decisions.

In a statement, Mr Cuomo said: “These subpoenas are part of an ongoing inquiry into billions of dollars in bonuses paid by Merrill Lynch late last year just days before Merrill was taken over by Bank of America. The fact that Merrill Lynch appears to have moved up the timetable to pay bonuses before its merger with Bank of America is troubling to say the least and warrants further investigation.”

While the back-and-forth fusillades between Mr Thain and BofA may not resolve the matter, Mr Cuomo’s inquiry could eventually pose a threat to Mr Lewis, BofA’s chief. It is expected that Mr Cuomo will not only look at the payment of bonuses, but also at Mr Lewis’ lack of communication with BofA shareholders about the state of Merrill’s financial condition before and after the December 5 shareholder vote to approve the transaction.

BofA has already been slapped with several lawsuits, alleging that Mr Lewis kept his shareholders in the dark about the state of Merrill’s financial condition prior to the deal being closed. BofA has said that it was only in the second week of December, after the shareholder vote, that Merrill’s losses ballooned well beyond expected levels. Mr Thain said on Monday that BofA’s managers were on site from September through December and that they received daily reports concerning Merrill’s financial condition.

2 comments:

Jeff Norman said...

Nothing much happened in the second week of December. The market bottomed on November 20, before the shareholder vote, and presumably the losses on their ill-timed mortgage-backed bets did as well.

pej said...

That's unfortunately a short-term bottom I guess...