Business

John Thain, Ken Lewis, Lewis fires Thain
Bebeto Matthew/AP
In this Sept. 15, 2008 file photo, Bank of America Chairman and CEO Ken Lewis, right, and
then Merrill Lynch Chairman and CEO John Thain, speak during a news conference in New
York.

Executive Conduct Under Microscope After Thain’s Dismissal

January 27, 2009 03:04 PM
by Josh Katz
Former Merrill Lynch CEO John Thain has been subpoenaed for the controversial executive bonuses he awarded. His firing has sparked debate about executive indulgence.

Thain Defends Himself After Departure From Bank of America

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On Wednesday, New York Attorney General Andrew Cuomo subpoenaed former Merrill Lynch chief executive John Thain and Bank of America’s chief administrative officer, J. Steele Alphin, because of the bonuses that Merrill Lynch paid to executives before its merger with Bank of America, the Associated Press reports.

On Monday, Thain, who was forced to resign last week as head of the merged company’s wealth management division, defended decisions he made when Bank of America bought Merrill. In a memo to Merrill employees, Thain claimed that Bank of America had already known about the bonuses and company losses that he has been criticized for, according to Reuters.

Thain was fired last week because of five fatal errors, according to Eric Jackson of TheStreet.com. First, bonuses for Merrill were usually paid in January, but Thain paid them in December instead, before the merger with Bank of America closed. Furthermore, he paid $15 billion in bonuses, just 6 percent less than last year, despite the company’s financial straits. Just days later, Bank of America asked the U.S. Treasury department for another $20 billion from the Troubled Asset Relief Program bailout funds.

Second, he did not immediately tell Bank of America’s CEO Ken Lewis about Merrill’s fourth-quarter loss. Third, when the news surfaced about the Merrill bonuses, Thain traveled to Vail for a ski vacation. Fourth, Thain was going to attend the annual World Economic Forum in Davos, Switzerland, known for its extravagant parties by Wall Street bankers.

The fifth matter has garnered substantial attention in the media because of its lavishness. In early 2008, Thain spent $1.2 million to renovate his office using the same decorator that is redecorating the White House for the Obamas. “Among the expenses reported: $87,000 for an area rug, $11,000 for a ‘Roman shade,’” Jackson writes.

But in yesterday’s memo, Thain said he will reimburse Bank of America for the $1.2 million in renovations, claiming the decision was “a mistake in the light of the world we live in today,” reports Reuters.

Thain also argued in the memo that Ken Lewis and Bank of America knew about Merrill’s financial situation when the merger took place. “We were completely transparent with Bank of America,” Thain was quoted as saying by Reuters. “They learned about these losses when we did.”

He also claimed that Merrill’s fourth-quarter losses were not his fault. The policies of his predecessor at Merrill, Stanley O’Neal, were the reason for the losses, according to Thain. O’Neal was dismissed in October 2007.

Furthermore, Thain said the bonuses he dispensed were down 41 percent from the year before and that the “size and timing of the bonus payments ‘were all determined together with Bank of America,’” Bloomberg writes.

However, Scott Silvestri, a spokesman for Bank of America, disagreed with some of Thain’s assertions. Silvestri said that Merrill made the bonus decisions without Bank of America. “John Thain and the Merrill Lynch compensation committee made the decision on the amount and timing of year-end compensation at Merrill Lynch,” Silvestri said on Monday, according to Bloomberg. “We had no legal right to challenge it.”

Opinion & Analysis: Did Thain deserve the ax?

The affair has sparked a great deal of attention not only because it represents corporate indulgence during an economic crisis spurred by Wall Street indiscretions, but because Thain was so respected in the Wall Street banking world. Industry experts widely believe that Thain deftly handled the $19.4 billion merger with Bank of America, keeping Merrill alive while Lehman Brothers and Bear Stearns crumbled, and winning a favorable price for his struggling company.

But the Financial Times says that the episode with Thain reveals why the public has such disdain for the business elite. “Whether or not the bonuses were legal—and it seems they were—outside the parallel universe of investment bankers they are seen as looting. Bankers played a very big part in setting fire to the world economy—and reaped large rewards for their recklessness,” the paper writes.

Eric Jackson of TheStreet.com also describes what this means for the economic climate. “What this sorry episode teaches all analysts, media, and investors is that we need to appreciate success and achievement but always remain skeptical,” he writes. “We shouldn't be afraid to ask tough questions even about ‘untouchable’ CEOs like Apple’s Steve Jobs, JPMorgan Chase’s Jamie Dimon, or General Electric’s Jack Welch. Past success no longer guarantees future success in today’s world.”

Bill Saporito of Time magazine says that Thain and Lewis clashed on a number of issues. According to Saporito, Thain “infuriated Lewis by paying out a couple of billion bucks in bonuses before the deal had closed and before disclosing to Lewis that Merrill was going to produce $15 billion in losses for the quarter.”

The Times of London takes a different point of view on the situation. The editorial entitled, “John Thain is neither hero nor villain,” acknowledges that Thain made major mistakes with bonuses, and, of course, his office renovations. However, the Times of London agrees with Thain that he is not to blame for Merrill’s downfall: Thain made the unpopular decisions that any company executive must make, and “it was his predecessors who wrecked the house.”

Similarly, William Cohan of Fortune says that Thain may simply be the victim of his own position. Cohan argues, “For the simple reason that when things start getting dicey on Wall Street, even in its present devolved state, being No. 2 on the totem pole is by far the riskiest and most dangerous position of all.” With the economy tanking, CEOs are desperate to hold onto their positions, and if they can’t blame themselves, they have to blame someone else.

According to Cohan, “The sad truth is that the strategy of forcing others to take the fall for your poor decisions can only work so long. Nobody forced Bank of America to buy Countrywide Financial or Merrill Lynch.”
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