Finally, something worth taxpayer money

The uncovering this week of certain oddities concerning the Bank of America-Merrill Lynch deal finally gives the US government a real reason to spend taxpayer money – a full investigation into the circumstances surrounding the merger itself, the failure of the bank to disclose $15 billion in fresh losses before the shareholder vote on the merger, and the nefarious acceleration of bonuses payments to Merrill Lynch bankers before the closing of the transaction.

The behavior of John Thain, in particular, provides a case study of everything wrong with Wall Street. In December, he beseeched Merrill Lynch’s board of directors to consider a $10 million bonus for himself, in addition to millions more for other senior bankers, this after the firm had lost nearly $12 billion during 2008 (not including the newly disclosed $15 billion loss for November). Thain contended that his role as deal-maker in the BoA tie-up saved shareholders billions of dollars and preserved the Merrill franchise. This is undoubtedly true; however, let’s think about this a little bit.

Thain had been on the job for nine months. There was no serious merger news prior to the announcement of the BoA deal. In fact, when one reviews the timing of events back in September, only after it was abundantly clear that Lehman Brothers was a “dead bank walking” did Mr. Thain warm to the idea of a merger. Only then, perhaps, did he understand how deep in shit his own bank was standing. It could be reasonably argued that, had Thain done his job, he could have figured this out well before Wall Street plunged into crisis. Instead, all he did was nudge Lehman that final foot over the cliff by entering into talks with Ken Lewis and BoA – if BoA could take Merrill, what would they want with Lehman? And, of course, Ken Lewis never saw a deal he didn’t like, no matter how much shareholder equity it destroys. In short, a Merrill Lynch janitor could have gotten this deal inked. All it took was a little ruthlessness and a whole lot of deception.

It seems clear to me that Thain is going to be embroiled in legal trouble for quite some time. There appear to be securities violations left and right, particularly around disclosure. Already, plaintiffs have filed a shareholder class action lawsuit against BoA and Merrill for providing false and misleading materials to shareholders vis-à-vis the stock-for-stock merger of the two banks.

If Mr. Thain et. al. get out of this merely disgorging their 2008 bonuses, they should count themselves as lucky – there could be far harsher things waiting for them.