Unbelievable Corporate Malfeasance

One of the biggest questions in the past several weeks among the financial community is this: How did the Bank of America merger with Merrill Lynch collapse in such a short period of time?

In cases like this, there is always enough blame to go around. But the primary culprit of this disastrous marriage is John Thain, former CEO of Merrill Lynch. Thain seemed like a great choice to take over as CEO in 2006 -- he had previously risen through the ranks at Goldman Sachs, and had led the New York Stock Exchange. He was seen as slightly aloof by some coworkers, but his number-crunching mindset was categorized as brilliant at the time.

That was then. When Thain joined Merrill Lynch, he made several mistakes that would come back to haunt him, and lead to the collapse of his company. First, he brought in an entire group of New York Stock Exchange management employees to lead major divisions of Merrill -- thereby alienating long-time leaders of the company. The NYSE board members brought in to help did nothing of the sort, and expanded Merrill into mortgage areas that the company was ill-equipped to handle at the time. According to one source within the company, when Thain realized that his plans were not working and his second-quarter losses came in, he uncharacteristically threw a chair against the wall. Maybe that was a symbol of what was yet to come.

After the collapse of Lehman Brothers in October, the government was in a panic. Merrill Lynch could (and probably would) collapse, too, without outside intervention. Enter Bank of America, a bank who had expanded rapidly, with a strong cash flow (despite recently acquiring Countrywide Mortgages this summer, a risky move). Ken Lewis, BAC's CEO, agreed to acquire Merrill. At the time, Lewis was lauded as a hero: saving Wall Street from complete and utter chaos, and in the process, acquiring a well-known entity that would, in the long run, help his bank to expand.

Oops. Lewis had only 48 hours over the weekend in October after Lehman Brothers collapsed to fully examine Merrill's books. No one anticipated that Merrill would have enormous fourth-quarter losses, or that it retained "bad debt" of over $100 billion.

Thain was not forthcoming. In fact, his main objective? Immediately asking BAC for a $40 million bonus for himself, for putting together the merger that would eventually come to be seen as a financial disaster. As it became increasingly clear that Merrill was not in good shape, Thain lessened his demands for a bonus to $10 million. Finally, Ken Lewis made the wise decision to fire him from any board position at BAC. Thain also, incidentally, asked for a $3.2 billion bonus in total for his company's major management team for the year 2008. All while Thain was in the process of re-decorating his office for a price of $1.2 million. Are you getting the picture?

Thain very well knew that Merrill was in serious financial straits, and yet he didn't come forward and announce it to BAC. When BAC and Ken Lewis finally realized the extent of Merrill's losses in December, BAC made a frantic plea to the government to back out of the merger. However, the government and Treasury Secretary Henry Paulson denied this request, fearing a serious amount of economic chaos that would echo the Lehman Brothers collapse in October and further destroy the stock market. Lewis has some blame to take in this matter: he has always been too quick to expand his bank, although most expansions have resulted in positive results. Perhaps if he had looked more closely at Merrill's books in October, he wouldn't have made the merger. But 48 hours is not enough time to properly examine a company the size of Merrill, and severe government pressure to make the merger happen influenced Lewis' haste.

John Thain is an egomaniacal liar, and I hope that he's subject to a federal investigation into his complete lack of corporate ethics. He has singlehandedly taken one of the strongest banks in America (BAC) and, while not destroying it, put it into serious financial trouble due to the aforementioned $118 billion in "bad debt" that Merrill carried with it. He failed to work with Merrill's long-time management team (who, incidentally, had made Merrill a great success prior to Thain's entrance as CEO and his installation of a new team of former NYSE friends).

John Thain should be burned at the stake. Bank of America's shareholders now have to pay for Thain's corporate malfeasance. Shareholders have lost their annual dividends, which was a major attraction to buying BAC stock in the first place. Thain: what a bastard.