The Saga of Thain and Lewis

Posted by: Matthew Goldstein on January 22, 2009

John Thain is out at Bank of America. The last straw for the former Merrill Lynch chief executive officer was the news that a number of top executives at the once mighty brokerage got paid hefty bonuses on the eve of the firm’s Jan. 1 merger with BofA.

Thain’s days at the newly-merged banking giant were numbered ever since BofA disclosed that Merrill lost a whopping $15 billion in the fourth-quarter. The big loss at Merrill is what pushed the federal government to come up with another budget-busting bank bailout—-this one aimed at helping the Charlotte, NC-based bank complete the acquisition. BofA CEO Ken Lewis has said the magnitude of the big loss at Merrill didn’t become apparent until a few days before the merger was set to close. Federal officials, fearing the deal might collapse, came to the rescue with a $20 billion cash infusion and $118 billion in guarantees on some of the rotting assets at Merrill and Bofa.

The bailout was the second-helping of government largess for the bank.

But it’s fair to wonder whether Lewis’ days at the helm of BofA may be also numbered. It’s not clear how such big losses at Merrill could have “materialized late in the quarter,’’ as Lewis has said, without anyone at BofA being aware of them. Much of the loss is attributed to the sudden deterioration in a large pool of corporate loans and commercial real estate-related securities in Merrill’s investment portfolio. But many of those assets began to quickly loose value in the days immediately following Lehman Brothers’ bankruptcy filing on Sept. 15.

No one from BofA or Merrill has yet commented on what might have precipitated such a rapid decline in asset value in the final weeks of December.

But now that taxpayers have a big stake in the success of BofA, it’s critical for the bank’s management to start providing answers and becoming much more forth coming about the events the caused the big losses at Merrill. Getting answers is key because it will help to determine whether the combined BofA and Merrill are sitting on some more ticking time bombs. Additionally, it’s important to know whether the big losses at Merrill were foreseeable and could have been planned for better by BofA.

After all, there’s no evidence that Lewis was pressured to buy Merrill. He agreed to buy the brokerage the same weekend that Lehman was filing for bankruptcy. Lewis agreed to pay a handsome premium for Merrill even though there were no other bidders for the brokerage and the shares were plummeting at the time the deal was inked in mid-September.

In fact, BofA has a spotty record when it comes to doing due diligence on exotic securities. The bank, in May 2007, was the underwriter on the last big subprime-backed CDO—a mega-deal for the now infamous Bear Stearns hedge funds. BofA, in a lawsuit, claims it was duped by the former managers of the Bear funds, who were indicted last summer on federal securities fraud charges. But BofA went into that $4 billion collateralized debt obligation deal—High Grade Structured Credit CDO 2007-1—at at time that the market for subprime mortgages was well on its way to falling apart. The bank now claims it lost about $1 billion on the deal.

So Lewis and his management team have fumbled before when it comes to gauging problems with toxic assets. It seems only fair then that the price for getting government aid should include a lot more transparency and disclosure by the bank executives who go begging for a lifeline.

Reader Comments

BAC Investor

January 22, 2009 7:17 PM

There is no question but that BAC should clean house. First to go should be Lewis. No company in the world can afford an executive that has that much ego and that little common sense. He couldn't wait to buy Countrywide and Merrill Lynch because he wanted to be the biggest Kahuna. Now he is one of the biggest remaining fools in the financial world. There will be others, too.

williambanzai7

January 22, 2009 9:50 PM

Yesterday's Conversations:

KEN: Nice carpet John, should I take of my shoes?

JOHN: Use the slippers by the door.

KEN: I hear their selling Bernie's fleet. Some nice hardware there.

JOHN: The guy is a seedy low life crook, he belongs behind bars.

KEN: Come on John, don't be so hard on the man. He's like all of us in a sense.

JOHN: Have a seat KEN (Pointing to COMMODE ON LEGS)

KEN: Man this place make my digs look like a Japanese bankers office.

JOHN: (Sitting in George the IV Chair) Every King has his castle.

KEN: So you got your bonus after all?

JOHN: How so?

KEN: You gave it to all your friends down the hall and spent the pre-installment on this fancy hardware.

JOHN: You like that eh?

KEN: You know John, I think I am going to go over and have a look at Bernie's fleet.

JOHN: Shall I join you. You know China Fun is just down the block from his place.

KEN: No John, you stay here and pack this stuff up while I'm gone.

JOHN: Pack?

KEN: Yes, pack. I want you out on the street by 5 PM.

JOHN: I don't have any shrink wrap. See you in bailout hell Ken.

KEN: We are already there John. We are already there.

[One hour later]

BERNIE: Ken, you have my sympathy. People just don't appreciate the Ponzi business model in all its subtle manifestations.

KEN: Skip the sermon Bernie, I'll take em all.

inspir3d

January 22, 2009 11:16 PM

Yes BusinessWeek.

you guys are finally talking some sense compared to the rest of the other newspapers

Ken Lewis should be fired...haha.

Now, he looks like the dumbass he was when he overpaid through his nose for MER.

John Thain is the master salesman who did his job. bravo!!!

Joe McDonald

January 23, 2009 12:56 AM

Capitalist at it worst (or is it?). How can honest, hard-working Americans see any hope? They lost their 401k, 529 as they try to follow rule while the government is busy bailing out these crooks...

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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