John Thain resigned under pressure from Bank of America on Thursday after reports he rushed out billions of dollars in bonuses to Merrill Lynch employees in his final days as CEO there, while the brokerage was suffering huge losses and just before Bank of America took it over.
The bonuses were paid before Bank of America’s acquisition of Merrill became final on Jan. 1, and while Bank of America was privately telling the government that Merrill was losing so much money that the deal might fall through unless it could get more federal bailout money.
Bank of America later received an additional $20 billion from the government, in part to offset the unexpected Merrill losses. The brokerage lost $15 billion in the fourth quarter and more than $27 billion for the year.
The bonuses, typically paid in January, were instead given in December and totaled $3 billion to $4 billion, the Financial Times reported Thursday. Bank of America would not confirm the size of the bonuses.
Scott Silvestri, a Bank of America spokesman, noted that Merrill was still operating as an independent company at the time the bonuses were paid. Had Thain not acted early, it would have been up to Bank of America to pay or reduce the bonuses later.
Bank of America CEO Kenneth Lewis flew to New York on Thursday to meet with Thain, and within hours the spokesman issued a terse statement saying the two had “mutually agreed that his situation was not working out and he would resign.”
The government helped orchestrate the acquisition of Merrill by Bank of America over the same weekend in September that another investment bank, Lehman Brothers, went under, setting off the most intense period of the financial crisis.
The government also promised last week to guarantee about $97 billion in losses on Bank of America’s troubled assets, most of it coming from Merrill Lynch.
Thain himself did not accept a bonus last year. Nor did four other top executives at Merrill: its president and chief operating officer, its president of global wealth management, its chief financial officer and its general counsel.
Thain, 53, is a former head of the New York Stock Exchange and a former chief operating officer of investment bank Goldman Sachs. He had been named head of a wealth management division of the merged businesses of Merrill and Bank of America.
In 2007, Thain topped the list of highest-paid CEOs in American business, with a compensation package valued at $83 million, according to an Associated Press analysis. That included a signing bonus and other enticements that helped lure him from the NYSE to lead Merrill.
CNBC said Thursday that Thain spent $1.22 million redesigning his office — including $35,115 for a “commode on legs” and $1,405 on a parchment waste can — when he became CEO of Merrill Lynch a year ago.
Thain also paid his driver $230,000 for one year's work, which included the driver's $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay, documents show. Drivers of top executives are often paid about half that amount.
New York Attorney General Andrew Cuomo has opened an investigation into the bonuses, a person familiar with the probe told The Associated Press on Thursday. The person spoke on condition of anonymity because the investigation is ongoing.
Silvestri said Lewis was aware of Thain’s decision to grant the bonuses, and some analysts said the disclosure also increases pressure on Lewis.
Bank of America stock, which was already tumbling Thursday, fell further after reports of Thain’s departure but later regained ground. It closed down 97 cents, or more than 14 percent, at $5.71.
Bank of America stock has been among the hardest hit in the financial sector. It has lost almost 60 percent of its value since the Merrill deal went through. The stock is down 85 percent from one year ago.
“From a shareholder standpoint, board standpoint, you would really have to question his judgment,” said Jason O’Donnell, a bank analyst with Boenning & Scattergood Inc.
It is unclear who would replace Lewis as Bank of America CEO if he were ousted by the board of directors. Thain was rumored to be most likely to be Lewis’ eventual successor, O’Donnell said.
“Clearly Lewis made a bad deal. Thain did a very good job in selling him on the prospects of Merrill,” he said. “He needs to take responsibility for that transaction.”
At the very least, the payment of bonuses indicates Thain was “completely tone-deaf to the culture of B of A,” said Tony Plath, finance professor at the University of North Carolina at Charlotte.
“My surprise is the board gave him an opportunity to resign and didn’t just fire him,” he added.
A spokesman for Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, said Frank was “very disappointed to learn this news, and these banks are the toughest people in the world to try to help.”
Sens. Johnny Isakson, R-Ga., and Kent Conrad, D-N.D., said at the Capitol that they were not familiar with the details of the situation but that it would be an outrage to award bonuses in advance while the brokerage firm was suffering big losses.
“If it’s found to be true that people were taking huge bonuses while accepting government assistance or taking bonuses while their shareholders were taking huge losses, it’s unconscionable in my judgment,” Isakson said.
Some analysts expected Thain to leave soon anyway. When two huge companies link up, one of the CEOs from the standalone companies usually departs. Bank of America named its general counsel, Brian Moynihan, to replace Thain.
Bank of America has come under criticism for acquiring Merrill and its huge losses, and Lewis has spoken out in the past about his dislike of the investment banking business.
In October 2007, after Bank of America posted a 32 percent drop in third quarter profits, hurt heavily by investment banking results, Lewis said: “I’ve had all of the fun I can stand in investment banking at the moment. So to get bigger in it is not something I really want to do.”