Thursday, February 12, 2009

A short note on the Merrill Lynch bonuses 

I, for one, feel a bit sorry for Bank of America CEO Ken Lewis, and not just because he had to suffer through Maxine Waters' inanities yesterday. First, the government pushed Bank of America not to walk away from the acquisition, as it had every right to do once the extent of Merrill's losses became evident. The Fed was worried that if the Merrill acquisition blew up it would cause a panic on Wall Street, so it twisted BofA's arm hard. Now, everybody is busting Lewis for the bonuses that Merrill paid before Bank of America owned it. The claim is that Bank of America "signed off" on the lavish pre-closing Merrill bonuses.

I doubt it. The linked article from the Times, and New York Attorney General Andrew Cuomo, intentionally or ignorantly miss the point that acquirers have to take great care to avoid interfering with the business decisions of the target before the acquisition closes. There are at least two reasons for this. First, during the period between the signing of an acquisition and its consummation the acquirer remains in competition with the target. Acquisition agreements are far from a complete defense against collusion between competitors under the anti-trust laws. Second, if the acquirer makes decisions or takes actions that might later be held to damage the value of the target, the target's stockholders will have a basis to sue the acquirer if the deal does not close.

The result is that competitors under a signed acquisition agreement may only consult with each other under severe constraints enforced by the lawyers advising the parties. It is highly probable that Bank of America did not "sign off" on any bonuses, but rather signalled or even stated explicitly that it would not raise an objection under the acquisition agreement if Merrill went ahead and paid the bonuses. That is, BofA agreed that the payment of the bonuses would not be a breach of contract, but did not "sign off" on them from a business perspective.

In any case, Andrew Cuomo's investigation is nothing but rank political pandering in the tradition of his loathsome predecessor. That the New York Times provided no legal context for the story about the bonus "sign off" is strong evidence that it is complicit in that pandering.


By Anonymous Anonymous, at Thu Feb 12, 10:10:00 AM:

Yeah, but TH, these bonuses were way, way outside the ordinary course of business. Every agreement I've ever seen included a prohibition against exactly these sorts of actions, in the form of a "don't take any action outside the ordinary course" clause.

As far as the assertion you made that BofA had every right to walk away from the deal, presumably you're arguing there was a material adverse change issue. The news accounts I've been reading said that the BofA lawyers argued internally, even before calling the treasury to ask, that this was far from clear. Bad drafting, maybe.

In any case, I completely agree Cuomo is just as despicable as the terrible man he replaced. Once the CRA story is better understood by history, his habit of political pandering will be seen for the economic terror it really is. This is the sort of demagoguery I really hate most of all, using the power of the state to score really cheap political points on damaged institutions that should be supported, not disparaged.  

By Blogger TigerHawk, at Thu Feb 12, 10:49:00 AM:

I do not believe that the bonuses were at all outside the ordinary course, except as to timing. That was justified, in theory, by a genuine concern that competitors would pick off Merrill's top producers during the interregnum between the signing of the agreement and closing. Indeed, there is a good argument that if Merrill's staff had been decimated then BofA would have had a material adverse change. BofA would not have opposed the bonuses if they had been justified on that basis, because it would open it up to lawsuits from Merrill stockholders.  

By Anonymous Anonymous, at Thu Feb 12, 04:00:00 PM:

We agree then that while paying bonuses was not outside the ordinary course, the timing is the issue. I believe that's the "outside the ordinary course" part. These weren't retention bonuses either. If they were retention bonuses I'd expect both BofA and Merrill would have publicized that fact. Instead, all I've heard is that these were performance bonuses for 2008 production.  

By Blogger Cardinalpark, at Thu Feb 12, 05:44:00 PM:

It's really ridiculous and a reflection of the fact that most people don't undertsand the nuances of this kind of activity - esp journalists - that this is a "Story." Of course, BofA knew the magnitude of the coming losses and the bonus payments. More criitically, they knew in detail Merrill's balance sheet before and after the marks. Frankly, it was in BOfA's interest to see the bonuses and bad marks flush immediately prior to closing - they threw in the kitchen sink.

Having said that, what BofA and Merrill (and few others) did not know in September when they made their deal was that Novemmber and December would be awful for the credit markets - hence the marks were brutal. And while it was pretty clear to me that BofA overpaid in September, by December ot was dead clear.

Paulson didn't let Lewis back out or renegotiate, but promised more capital, and that's what he got. Lewis needed to scapegoat someone, and that became Thain.

Thain took care of his constituents absolutely perfectly. Merrill's board, shareholders, customers and employees should worship the guy - Merrill could have been Lehman folks.

As for Lewis and BofA, they are stupid thugs. They massively overpaid first for Countrywide and now for Merrill. The Merrill people are leaving in droves. It will not end well.  

By Anonymous Anonymous, at Thu Feb 12, 10:06:00 PM:

You can add MBNA to the Lewis hit parade. No matter how good the relative discipline of MBNA's risk controls versus the industry, buying the largest credit card provider on the eve of the worst downturn in seventy years, if that's where we go, is spectacularly bad timing. Has any one man so massively overpaid for so many businesses in the history if the world?  

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