In November 2007, John Thain, the former CEO of Merrill Lynch, took over a business that had been battered due to poor investment decisions (primarily, CDOs) that were not made on his watch. He executed two very aggressive, but correct decisions that almost certainly saved Merrill Lynch. First, he sold the CDO portfolio to Lone Star for 22 cents on the dollar. This should probably be considered a steal considering where CDOs are priced now. Second, he sold Merrill Lynch to Bank of America (BoA) at more than $20 a share, while its peer firms went through either a forced sale (Bear Stearns), a bankruptcy (Lehman Brothers) or are now teetering on insolvency (Citigroup). This was a great deal for Merrill and a terrible deal for BoA whose stock has fallen precipitously following this transaction. Indeed, it has been reported that, shortly after the transaction, Ken Lewis, the CEO of Bank of America, wanted to invoke the material adverse event clause to reverse the transaction. Despite all this, somehow John Thain has been fired and Ken Lewis keeps his job. That is ridiculous.
Now, the New York State Attorney General, Andrew Cuomo, wants to subpoena Thain for paying out $4 billion bonuses to his employees prior to the sale. This is a business, however, where more than 40% of compensation is paid in bonuses. Admittedly, some individual businesses had inflicted serious losses, but other businesses performed well. These bonuses were transparent to BoA and to the Board. In fact, it is reported that BoA actually recommended reworking the mixture of compensation to make it 70% cash and 30% stock to conform with BoA’s bonus protocols. Moreover, these bonuses cannot be viewed in a vacuum, they need to be compared to previous year’s bonuses (2006 bonuses were much more than double 2008 bonuses) and total employee compensation to fairly judge them. The criticism about the $1.4 million refurbishment of Thain’s office is probably more fair, but irrelevant in the overall scheme of things. He has apologized for this and admitted that this took place in a different economic climate.
Now, Andrew Cuomo wants to subpoena Thain to testify about the bonuses. This is a waste of the taxpayer’s money pursuing something that observers are declaring was clearly legal solely so that Cuomo, in what is now a consistent pattern, can grab headlines without actually effecting any real change to benefit the citizens of New York. It is hard to argue that Cuomo is doing this for the citizens of New York. Cuomo cannot even argue that he has an axe to grind on executive compensation. It was his decision to drop the charges against Dick Grasso for receiving nearly $180 million in compensation. Yet, now he wants to pursue those same cases because he can milk them for publicity.
2 responses so far
1 InTheMiddle12 // Jan 29, 2009 at 4:39 am
This is a topic I feel, in a small way, qualified to chime in about. I worked for Merrill Lynch during the Reagan era in the area that oversaw the corporate perks. The two helicopters, the corporate jet, helicopters, arena boxes, suites, etc. I was there during the move from One Liberty Plaza to the World Financial Center. It was a heady time, until Black Monday. I’m not a financial guru, by any stretch, but I remember having friendly arguments with the well heeled in the cafeteria about how greed and fear seemed to run the firm, relationships and decisions. I was told I didn’t understand free markets, etc. And then came Black Monday, something those that argued with me said would never happen. 25% of staff went. I was one of them. The infamous ML executive floor was filled with ridiculously high end furnishingse and digs. Bonuses, though I wasn’t one of the eligible, went out in February, not December. Clearly Thain, seeing the writing on the wall, changed the rules of the game. I fully expect people like this writer to justify his actions, because that is the nature of the Wall Street unconscious. I mean no disrespect however my experience, and again, I was there, in the thick of this culture, was always out of touch with the reality of the non-investment banker’s realities. I could be much more specific but frankly what’s the point? Merrill is gone, Thain will, in my belief, rightly be reviewed for the bonus scandal, and it is a scandal. None of it surprises me, not even the fact it’s taken a catastrophic meltdown to force Merrill to its knees. And now we learn of $1,400 waste paper baskets. Trust me, that’s nothing. You should have sitnessed the fights between CEO and COO and the executive floor over the corporate jet and how they were justified. Since tax payer money is now involved, you bet I want a full audit of what’s gone on and full transparency on expenses. If it was Merrill’s money and not tax payer money I’d think it was tasteless, but since countless tax payer dollars have now been poured into the firm, you bet I want accountability and if Thain turns out to be in the wrong place at the wrong time, so be it. The last decent leader that firm had was Roger Birk, a classy guy. After that, it went downhill. Just my two cents.
2 suey // Jan 29, 2009 at 6:17 am
There is no excuse for any company to pay a bonus when it has made a loss in a year. If you do that in a normal company you are robbing the shareholders. If you do it in a tax funded (Nationalised) company they you are robing the taxpayer.
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