Thain Departs BofA—An $87,000 Rug? Say It Ain't So, John! Client AUMs Fall By 30 Percent In 2008
sponsored by:
John Thain, former CEO of Merrill Lynch and the man who engineered the sales of the storied Wall Street firm to Bank of America in September, is leaving the combined firm "immediately," according to a report from CNBC. A Merrill spokeswoman declined to comment.
Thain's sudden departure comes a little over a week after it was revealed that Merrill would post a fourth-quarter loss of $15.3 billion. (For the year, Merrill lost $41.2 billion from operations, pre-tax—or $27 billion including an "income tax benefit.") And yet, compensation and benefits of $15 billion paid in 2008 was just 6 percent below 2007 compensation and benefits, according to company reports. The FT reported this morning that an estimated $3 billion to $4 billion was paid out as bonuses in December—a month earlier than usual. The insinuation: Thain and the compensation committee pushed through the bonus in a hurry, beating the BoA's official takeover on January 1.
Thain's departure is the third among Merrill's top executives, who at the time of the merger announcement in September were said to be fully on board at the new combined company. Robert McCann, who was head of Merrill's brokerage unit, had been somewhat vaguely appointed "head of the combined financial advisor organization" in October before announcing his departure soon after the deal closed on January 1; Greg Fleming, president and COO of Merrill, left the firm the following week.
Merrill's massive fourth-quarter loss, the result of more soured mortgage assets, appears to have come as a surprise to Bank of America CEO, Ken Lewis, as well as Thain. If true, Lewis was understandably steamed by the fourth-quarter numbers that also included a loss of $10 billion in client assets along with several of the firms' top financial advisors—a huge hit to Merrill's retail brokerage unit, whose 16,090 financial advisors (at fiscal year-end 2008) are, in Lewis' words, the "crown jewel" of the takeover. In all, Merrill lost about 3 percent of its FAs in 2008. U.S. client assets are $1.1 trillion—down from $1.6 trillion at the end of 2007. That's a 30 percent drop in client AUMs.
Initial reaction among Merrill's financial advisors: Thain's departure was inevitable. In the words of one top producer, a member of the firm's elite private banking and investment group (PB&IG) that caters to $10 million-plus accounts, "Anybody who thought a predator like Ken Lewis would keep around his chief competition is crazy."
He also said that McCann, Fleming and Thain surely won't be the only executives departing since "firing secretaries won't get us where we need to go." Support staff has already suffered, he says: Merrill has let 25 of 32 structured products sales personnel go since the deal was announced. In all, about 35,000 jobs are said to be at stake at the combined company. "Morale is low, that's for sure. The reason isn't cultural, it's because our clients have lost boatloads of money and so have we. I'm worth 7 percent of what I was just one year ago."
What everyone wants to know now is whether Thain and Lewis knew the extent of Merrill's fourth-quarter troubles. In fact, one BofA shareholder filed a lawsuit yesterday against BofA, claiming Lewis knew of the coming $15 billion loss and still went ahead with the Merrill purchase. Former Merrill Lynch analyst Henry Blodget is another who has been loudly criticizing Lewis since Merrill's quarterly loss was announced. Blodget—who is banned from the securities industry for life for putting buys on stocks he thought were dogs to win or support Merrill investment banking clients—says Lewis needs to be fired immediately. Not only did he orchestrate the purchase of Countrywide's toxic balance sheet, but now Merrill's too—and on top of it, he's received $50 billion in taxpayer money from the TARP fund to pay his way out of it.
Read Blodget's latest comments on the matter here.
News that Thain spent $1.2 million renovating his Merrill Lynch office with items like an $87,000 area rug came out—coincidentally this morning, hours after Thain was dismissed.
Of course, Merrill's demise wasn't caused by John Thain. Some regarded Thain as something of a savior since he got Merrill bought before it blew up. The previous CEO, Stanley O'Neal, is the one who is blamed for amping up Merrill's mortgage-backed securitization business.
The 53-year-old Thain, known as Mr. Fix It for turning around the antiquated New York Stock Exchange, was hired as CEO of Merrill in December 2007, just three weeks after the ouster of Stanley O'Neal following a $2.3 billion loss in the third quarter. It would prove to be the first of six consecutive quarterly losses for Merrill, a firm which at that point hadn't experienced a quarterly loss in six years. Two big jobs were up for grabs at that point—Citigroup and Merrill were both looking for CEOs. According to reports, Thain told Merrill directors he didn't think anyone could handle the Citigroup job.
Thain announced the sale of Merrill to Bank of America only nine months later on September 15 following the collapse of Lehman Brothers (and Merrill's fourth consecutive quarterly loss). The sale price was set at 0.8595 BofA shares for every Merrill Lynch share in an all-stock deal that at that time made Merrill worth $50 billion, or $29 per Merrill share, a 70 percent premium on its September 12 closing price. However, by the time the deal closed on January 1, 2009, the value was $29 billion. Meanwhile, BofA stock has fallen from $32 in mid-September to just over $6 in late date trading.
