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Merrill's Other Big Payout


When your company is staring at a $15 billion loss in the face, every dollar saved through cost-cutting and scrimping counts. That’s a big reason there’s so much outrage over the news that former Merrill Lynch CEO John Thain signed off on some $4 billion in bonuses for top executives on the eve of the brokerage’s merger with Bank of America earlier this month.

But that wasn’t the only sizeable payout Merrill made in the weeks leading up to the closing of the deal with BofA. On Nov. 13, just three weeks before Merrill shareholders voted to approve the merger with BofA, Merrill’s former board approved the payment of 35 cent-a-share dividend to all common stockholders. The payout drained another $565 million from Merrill’s coffers at a time when the firm should have been building up cash, instead of spreading it around.

Now sure, one could argue that if Merrill had slashed the dividend to the bone, the brokerage’s stockholders may not have voted for the merger with BofA. But Merrill’s dividend payout came just weeks after Bofa announced on Oct. 6 it was slashing its dividend in half to 32 cents-a-share—a move the bank said would save it some $1.4 billion in cash each quarter. (The bank has since cut the dividend to a penny-a-share).

If nothing else, Thain & Co. should have taken a hatchet to Merrill’s dividend—especially after the pounding the financial system took in the wake of the Lehman Brothers bankruptcy filing on Sept. 15. By the time, Merrill’s board approved the dividend on Oct. 27, the federal government was well on its way towards pouring hundreds of billions of dollars in bailout money into the financial systems. There’s no evidence that BofA CEO Ken Lewis raised any private objections to Merrill paying a dividend on the eve of the merger vote. A spokesman for the bank couldn’t be reached for comment.

The storyline that’s now coming out from the tumultuous Merrill/BofA merger is that the magnitude of the fourth-quarter losses at the brokerage weren’t known until after the Merrill shareholders approved the deal on Dec. 5. But people across Wall Street aren’t buying that since so many asset classes—including corporate loans, convertible bonds and securities backed by commercial real estate—all got pounded immediately after Lehman collapsed.

Anyone with inside knowledge of Merrill’s investment portfolio could have seen that the brokerage’s investments in corporate loans and commercial real estate-related securities would all take a hit in the fourth-quarter. And that includes Thain & Co., as well as Lewis’ team at BofA, which was conducting its due diligence on Merrill at the time.

If nothing else, Merrill should have been moving to preserve as much cash as possible. And that means it should have forgone the awarding of bonuses, as well as dividends to common stockholders in the days leading up to merger with BofA.


Steve Ballmer, Power Forward
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