Thursday, October 01, 2009
Let me posit that John Thain, the former CEO of Merrill Lynch was irresponsibly and idiotically painted as a scoundrel, and if the Board of BofA had any combination of balls and sense, they would hire him to replace the now-ousted Ken Lewis.
To recap, Thain was brought in to Merrill in the midst of a panic. Stan O'Neal, Merrill's prior CEO, had run the Company into a precarious, life-threatening condition. Thain, who had already rescued the New York Stock Exchange from the onslaught of the Spitzer/Grasso scandal (itself a travesty) and moved the NYSE into the 21st century, was brought in by Merrill's board to save their bacon. He was well-trained to do so, having served as Goldman's CFO during their crisis of 1994, and later served as its co-president and co-coo at the time of Goldman's IPO.
Thain was extraordinarily successful. Let me say that again, Thain was extraordinarily successful. He saved Merrill from Lehman's fate. As a client of Merrill's I am grateful. The shareholders of Merrill should be grateful (since he sold the Company to Lewis's BofA for a rich price in light of the moment). On the same weekend Dick Fuld prepared bankruptcy papers for Lehman, and in the wake of Bear Stearns' ignominious sale to JP Morgan for first $2 and then $10 per share (i.e. nearly nothing), Merrill landed in BofA's arms at a significant premium..
And, notwithstanding Ken Lewis's appalling and disgusting behavior aimed at preserving his job at Thain's expense, it emerges that all of the accusations hurled at Thain (he "withheld" information about emerging writedowns on the Merrill balance sheet; he "withheld" bonus payment information to Merrill employees) was all manufactured lies. As far as his office furnishings, let me just say he deserves only the finest. Merrill shareholders would certainly agree.
Ken Lewis is today without a job, as he should be, because he was responsible for overpaying for Merrill and then making any number of excuses to explain a poor business negotiation. Thain should today be the CEO of BofA. While I sincerely doubt BofA's board has the cojones to re-hire him given the politics of the moment, their shareholders, clients and customers would ultimately benefit if they did so.
CP raised the Bank of America - Merrill situation. Here's some more detail I learned from day job.
Stan O'Neal should be publicly pilloried. Usually it's the job of an I-Bank CEO to stop others at the firm from playing "heads I win, tails the company loses." Not here. Stan was intent on making Merrill #1 in subprime mortgages and ran the company over a cliff. He fired executives who warned him of the risks. He pocketed a lot of bonus money before he was fired. Merrill settled the class action lawsuit early for over $500 million -- they had an even bigger exposure. I'm surprised Stan wasn't indicted.
There's a few things going on that may make Ken Lewis's world even more hellish. Ken is not clear of this by resigning. I don't know from the guy but Ken grew up being Hugh McColl's hatchet man, so Ken must be a prick among pricks.
The SEC brought charges over Bank of America (BAC)'s failure to clearly disclose the timing of the Merrill bonuses. The SEC ignored the elephant in the room -- that shareholders weren't told that BAC could have walked from the deal because of over $15 billion of unexpected Merrill losses ... but that Treasury Secretary Hank Paulson coerced BAC CEO Ken Lewis into closing. Can you say "material omission"? If the proxy statement had spelled this out, I doubt the deal would have been approved. If so, Merrill would have gone bust and the bonuses wouldn't have been paid at all. I suspect that the SEC didn't go after this, because if they had they'd embarrass the federal government and make the plaintiff lawyers securities lawsuit against BAC a lay-up ... or they were just incompetent. Instead the SEC brought narrower charges that didn't name any individuals at BAC, but the SEC still wanted a $33 million pay-off from BAC -- which if course would come out of shareholders' pockets. This settlement was dissapproved recently by New York federal Judge Jed Rakoff in a scathing opinion.
Here's another angle to the story: Tim Mayopolous was the general counsel at BAC. The day after the shareholder vote, Tim was called out of a meeting, fired and escorted from the building. NY Attorney General Andy Cuomo later had Tim testify. Because of this we know that Tim gave advice on whether BAC could have walked from the Merrill deal in the run-up to closing, and whether this all should have been disclosed to BAC shareholders. (Answers should be "Yes" and "Yes" for those of you playing at home). But we don't know what Tim actually said because BAC won't waive attorney-client privilege -- but you can infer that Tim dissented from the non-disclosure and was fired over it. Cuomo has been pressing the directors at BAC to overrule CEO Ken Lewis to waive privilege. So far they haven't. Cuomo may still charge some BAC executives, with or without the waiver. Cuomo can use New York's Martin Act to do this, which is a license to kill. The SEC brings a pen knife to street fight, the New York AG has a 12 gauge and a flamethrower if he wants to use it.
New York federal Judge Rakoff suspects that there's more to this than what the SEC charged. It's in a footnote to his recent opinion. Judge Rakoff wants a trial on the SEC charges this February. The SEC is in a tight spot. They can just drop charges, but they'll be castigated if they do -- including by Congress. If they go forward, expect Judge Rakoff to run the trial from the bench. If the SEC doesn't ask the hard questions, the judge will do it for them. If BAC's refuses to waive privilege, it won't look good. It'll look worse when the questions hone in on Tim's firing. The SEC will really be embarrassed if Cuomo shoots the elephant in the room that the SEC ignored. The SEC hasn't looked very good lately.
BAC thought they could just blame the inside and outside lawyers for bad advice, and muzzle the lawyers by claiming privilege. It doesn't work so well if it becomes known that Tim was dissenting.
I believe that Judge Rakoff is pursuing this for "truth and justice." Andy Cuomo has the ulterior motive of delivering a big payday to the plaintiffs lawyers. I don't think that any company lost more market cap in a two- or three-month period than BAC did at the end of 2008 going into 2009. It's a huge pool of shareholder damage claims. Plaintiff lawyers were at risk of early dismissal if they couldn't independently establish the inner detail of what transpired. Cuomo has already done that for them -- something I'm sure he'll remind them of when he's raising contributions for his run to be New York governor.
I don't know from John Thain -- he may be a hero here, or not. A precipitating event to the financial crisis was Thain's having Merrill sell a big batch of subprime assets back in the summer of 2008 for something like 30 cents on the dollar. This forced write-downs by other firms because of fair value accounting. I half believe the Goldman Sachs conspiracy theories, but don't know the underlying facts. We may learn more from Carl Levin's efforts on the Senate Investigations committee -- subpoenas have already been issued. Expect to hear that Goldman and others were underwriting subprime mortgage deals with one hand but shorting them with the other. Levin may even get into who was behind the panic that brought Lehman down. McCain is on this committee -- and has a battle ax to grind. Developing ....
I have a hard time buying this argument when it is well-known that the sale to BoA would not have gone through without the government strong-arming them. Also, I know much less about this, but it is my understanding that Thain could have sold earlier- he didn't go through with it because he wanted a better price. Shortly thereafter, when everyone knew how f#@*)ed Merrill was, no one wanted them.
In other words, if it wasn't for the government riding to the rescue, Thain would have needlessly run Merrill into the ditch.
I have a question regarding some of the strategy around Bank of America's bank growth. Since it is being argued that the purchase of Merrill Lynch was strong armed by the federal government (I doubt that will ever be proven) why would the fed need to do so?
The record for recent acquisitions by the bank includes Countrywide Mortgage, just before the great fall. It's only two data points for supremely poor judgment, but the Merrill Lynch acquisition does have a corollary. Maybe Ken Lewis wasn't strong armed, rather he strong armed his staff into taking a crappy deal.
Thain may just be a good relief pitcher called up in the top of the ninth and down by 5 runs.
Merrill was in the ditch before Thain was on board, but nobody knew exactly how big the ditch was.
Thain was basically at the top of the Wall Street food chain as co-head of GS when he was recruited to run the NYSE after the pay fiasco of his predecessor at the exchange. The NYSE job was not one he needed either from a financial or presitge perspective. He was recruited to go to Merrill when it was clear that ML was pretty close to being in work out. It was also not a job he needed to pad his resume or add to his bank account.
Blame him if you want for holding out too long for too high a price for ML, but the value of the franchise dropped steeply and swiftly along with everything else on Wall Street.
Full disclosure: Thain is a former colleague of a close friend of mine, and I met him briefly at a party last month. He seemed like a straight shooter. I would work for him.
Countrywide looked like a good deal for BAC at the time. It may still prove a good deal -- I don't know enough detail. Countywide has a huge mortgage origination platform that BAC got for nearly free after the benefit of tax NOLs. Countrywide didn't come with much credit risk as it's a securitizer. BAC was already heavily into Countrywide's business as a lender.
Lehman thought that it would get sold to BAC in a similar way to how Bear Stearns got sold to JP Morgan ... with a lot of government help. That's until Merrill Lynch jumped in. If you're Ken Lewis you'd much rather buy Merrill with all its brokers than bond shop Lehman. It's implausible that ex-Goldman Thain wasn't talking to ex-Goldman Paulson as this was developing. That doesn't make it wrong necessarily, but it does raise an eyebrow about who was saying what too whom. City slicker Thain fleeced country boy Ken Lewis real good ...
Paulson let Lehman fail. This will be much studied years from now. When countries have financial crises they often let the #4 or #5 bank fail to show market discipline, but protect the biggest. I'd argue that letting Lehman fail has only cemented "too big too fail" more firmly into place, given where we are now. Paulson has said that he didn't have the legal authority to save non-bank Lehman but I don't buy it. The government found a way to save AIG. If Lehman got the treatment that Goldman and Morgan Stanley got just weeks later -- quick conversion to bank holding company status, etc, etc -- it wouldn't have failed. We're still dealing with the aftershocks of Lehman's becoming a trillion-dollar wrench thrown into machinery of the global financial system.
Ed Cox -- former head of the SEC -- ran a controlled experiment in how to create runs on investment banks. He rescinded the 70-year old short sale uptick rule -- which led to a run at Bear Stearns. Then Cox put the rule back temporarily ... which settled things down through the summer of 2008 when it lapsed. Then we had a run on Lehman. [ This is a more valid scientific experiment than anything I've heard as proof of global warming. ] Goldman and Morgan Stanley were two weeks from failure ... don't believe what Goldman CEO Blankfein says now. Short selling is fine except for non-bank financials where liquidity scares can kill even a well-capitalized company quickly. Credit default swaps were a factor in this too. We may never learn what really happened.
Ed Cox was also responsible for I-Banks essentially getting put on the honor system for their financial reporting. This exacerbated everything. Ed Cox also liberalized the reporting rules for securitizations which also became a contributing factor.
Don't get me going on the rating agencies.
As a former employee and shareholder of Merrill (who never got around to selling the stock in my retirement account), I have to disagree about Thain's office. I don't expect him to get his furnishings from IKEA, but spending more than $1 million on his office after being brought in to rescue the company is tone-deaf to the point of stupidity.
I left a decade ago, but I used to spend a lot of time on the 32nd floor of Merrill's World Financial Center headquarters. Believe me, Thain's office was plenty opulent before he even arrived.