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The Saga of Thain and Lewis


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.


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