Thain called to testify on Merrill bonuses

Following the series of events of last week in reverse order:

• More details emerge on Thain
• John Thain fired by Ken Lewis
• Merrill and John Thain exposed by the FT

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.

More details emerge on Thain

It is worth reminding this sentence one more time:

When asked why he didn't wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated "the strategic opportunity was so compelling it couldn't wait."

All the following show how arrogant and corrupt Thain was. Hopefully this public humiliation will put an end to his career and reveal also what has been going on in the finance industry for the past many years.

Merrill Lynch CEO Thain Spent $1.22 Million On Office:

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

Additionally, documents showed that Thain signed off on the purchases personally, and that he used another $5,000 to pay the expenses Smith incurred in doing the work.

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.

This reckless behavior has brought BofA on the brinks of a collapse, and people are now talking about the bank as a defacto nationalized one:

Jan. 23 (Bloomberg) -- The U.S. government’s decision to pledge billions of additional dollars with strings attached to Citigroup Inc. and Bank of America Corp. may be nationalization by another name, according to former bankers and regulators.

Faced with pressure from lawmakers, banks have shaken up management, eliminated executive bonuses and staff and canceled conventions. They’ll be forced to do monthly reports on how they’ve boosted lending while slashing quarterly dividends to one cent a share for three years.

“When the Treasury tells a bank to pay a penny a share vs. its old dividend, you know who’s calling the shots,” said Jon Bruss, a 40-year industry veteran and founder of Hartland, Wisconsin-based Fortress Partners Capital Management Ltd., which invests in banks. “It may not be de jure nationalization but I think it’s de facto nationalization.”

The worst part is that a nobody like me was able to predict this whole mess since the very beginning. The good news is that even Ken Lewis job is now at stake, and he might have to resign very soon:

Jan. 23 (Bloomberg) -- Kenneth Lewis’s purchase of Merrill Lynch & Co., the deal that was supposed to cap his career as Bank of America Corp.’s master builder, may wind up derailing it.

Bank of America, the largest U.S. bank by assets, dropped 15 percent in New York trading yesterday as Lewis ousted former Merrill Chief Executive Officer John Thain three weeks after the transaction closed. The bank is worth $36.3 billion, a fraction of the more than $100 billion Lewis spent on acquisitions since he became CEO in 2001. Its quarterly dividend is a penny a share, down from 64 cents six months ago.

“This deal could cost Lewis his job eventually,” said Ralph Cole, a money manager at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which sold almost 361,000 Bank of America shares in the third quarter. “They will give him more time to work this out, but everything is moving so quickly.”
[...]
Lewis began to lose confidence in Thain in December, when he learned of Merrill’s loss from members of his own merger- integration team, according to a person familiar with Lewis’s thinking. Lewis indicated that he thought Thain should have been more proactive in keeping him apprised of the results, according to this person.

Lewis was further taken aback early this month, when he learned that Merrill’s investment-banking chief, Greg Fleming, planned to leave for a teaching job at Yale University. Lewis liked Fleming, 45, a 17-year Merrill veteran, and believed Thain had helped to drive him away, the person familiar with his thinking said. Lewis also was put off by the size of bonuses paid to Merrill employees, this person said.

Another person familiar with the matter said Merrill’s loss shouldn’t have been a surprise. Lewis’s transition team at Merrill’s headquarters had access to trading results daily throughout the fourth quarter, the person said. Moreover, Bank of America executives were deeply involved in discussions about year-end bonuses for Merrill employees, according to this person.

Thain’s actions indicate he didn’t see the end coming. In December, at Merrill’s final shareholder meeting, Thain said he wouldn’t have done anything differently during his tenure at Merrill. As recently as Jan. 21, he spent $483,066 to buy 84,600 shares of Bank of America at $5.71 each, a regulatory filing showed.

The next day, at 11:30 a.m., Thain found himself face-to-face with Lewis, who had flown up from Charlotte, in his 33rd-floor office at Merrill’s headquarters in downtown Manhattan’s World Financial Center. It was the same office previously occupied by Thain’s predecessor, E. Stanley O’Neal, who resigned in October 2007 after the firm reported a then-record $2.24 billion loss.

The office had undergone a transformation. Thain spent $1.2 million early last year to redecorate, a person familiar with the matter said. The costs included $87,784 on area rugs and $18,468 on a George IV chair, CNBC reported.

John Thain fired by Ken Lewis

Just a few hours after my previous post about the robbery orchestrated by Thain and the massive losses hidden in Merrill, Bloomberg reports that John Thain is leaving BofA where he was supposed to be the head of investment banking. The final sentence shows also the extend of the debacle and pillage of Merrill's shareholders:

Jan. 22 (Bloomberg) -- John Thain, who engineered the sale of 95-year-old Merrill Lynch & Co. to Bank of America Corp. in September, was ousted after Merrill’s $15.4 billion loss forced the bank to seek more money from the U.S. rescue fund.

Thain, 53, “agreed his situation was not working out and that he should resign,” said Robert Stickler, a Bank of America spokesman, in an e-mail. The resignation ends Thain’s tenure with the Charlotte, North Carolina-based bank less than a month after Merrill’s takeover was completed.

[...]

Thain this year spent $1.2 million to redecorate his office at New York-based Merrill, CNBC reported today.

Merrill and John Thain exposed by the FT

The FT published this interesting report about the shameful behaviour which looks more like a robbery than anything else (emphasis mine):

Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America.

The timing is notable because the money was paid as Merrill’s losses were mounting and Ken Lewis, BofA’s chief executive, was seeking additional funds from the government’s troubled asset recovery programme to help close the deal.
[...]
In past years, Merrill had paid bonuses later – usually late January or early February, according to company officials.

Within days of the compensation committee meeting, BofA officials said they became aware that Merrill’s fourth-quarter losses would be greater than expected and began talks with the US Treasury on securing additional Tarp money.

Last week, BofA said it would be receiving $20bn in Tarp money, in addition to the $25bn that had been earmarked for it and Merrill last year. It was then revealed that Merrill had suffered a $21.5bn operating loss in the fourth quarter.

Despite the magnitude of the losses, Merrill had set aside $15bn for 2008 compensation, a sum that was only 6 per cent lower than the total in 2007, when the investment bank’s losses were smaller.

The bulk of $15bn in compensation was paid out as salary and benefits throughout the course of the year. A person familiar with the matter estimated that about $3bn to $4bn was paid out in bonuses in December.

Nancy Bush, an analyst with NAB Research, described the size of the 2008 Merrill bonus payments as “ridiculous”.
[...]

BofA in deep trouble, Ken Lewis humiliated

I already mentioned in Creature of Bernankenstein that the BofA acquisition of Merrill Lynch was highly overpaid and that it would anyway lead to a disaster. Remember how crazy Ken Lewis got about his acquisition? Like a kid with a new toy? He had already acquired Countrywide, which was a major mistake, but he couldn't prevent from doing a bigger one.

When asked why he didn't wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated "the strategic opportunity was so compelling it couldn't wait."

Oh, and of course, both the government and the Fed are massively pouring money into BofA to keep it afloat and the bill is going to be sent the USD holders (and not just the US tax-payer as I see written just EVERYWHERE). Government intervention is destructive of value, not creative.

The nightmare scenario is now unfolding:

Jan. 15 (Bloomberg) -- Bank of America Corp., the biggest U.S. bank by assets, may get more aid from the government to help absorb losses tied to this month's acquisition of Merrill Lynch & Co., three people familiar with the matter said.

Details are likely to be disclosed on Jan. 20, the people said. That's when Bank of America may post its first quarterly loss in 17 years as it digests the purchases of Merrill Lynch and Countrywide Financial Corp. The combined company has already received $25 billion from the U.S.

Bank of America told regulators in December the takeover might be abandoned because of Merrill's worse-than-expected results, said the people, who declined to be identified because the talks are private. The government insisted the transaction proceed because its collapse would create new turmoil in the financial system, they said.
[...]
The Merrill purchase followed Bank of America's July acquisition of Countrywide, the largest U.S. home lender. That transaction is probably causing losses at Bank of America because of the declining value of U.S. home prices, Townsend said. Losses from Countrywide's loans to delinquent borrowers may top $29 billion through 2011, Horowitz wrote in his report.

Jan. 16 (Bloomberg) -- [...]

The fourth-quarter loss of $1.79 billion, or 48 cents a share, compared with net income of $268 million, or 5 cents, a year earlier, the Charlotte, North Carolina-based company said in a statement today. Results didn't include a $15.3 billion loss at Merrill, acquired this month.

The losses, coupled with the government lifeline of $138 billion, raise doubts about the future of Chief Executive Officer Kenneth D. Lewis, who engineered takeovers of unprofitable New York-based brokerage Merrill and ailing mortgage lender Countrywide Financial Corp. [...]

“This thing is unraveling so fast Lewis may know his job is lost,” said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia, who has an “underperform” rating on Bank of America. The management team has “lost credibility,” he said before results were announced.