John Thain was having a very, very bad morning on January 22, 2009. Ken Lewis had phoned the day before from Charlotte to schedule an urgent meeting in Thain’s New York office for 11:30 a.m. Thain could only guess what Lewis wanted, but the thought of his boss’s private plane barreling north was not a comforting one.
It had been four months since the triumphant announcement of Merrill’s sale to Bank of America, which had saved the investment firm’s hide in the wake of Lehman’s failure. Thain had agreed to stay on to support the merger and to ease the way in what would be a complex venture. It was difficult to explain to anxious shareholders that the sale did not mean an overnight correction. Merrill still had problems on the books, although Thain was working overtime to divest the company of the remaining toxic assets. He had anticipated all along that it would be a difficult several months. The deterioration of the market had continued, and though he’d been aggressive in moving away from mortgage-related products, there were still enough of them on the books to cause pain. There were huge spreads between the prices of cash assets and credit default swaps, and any type of forced selling drove asset prices down. That meant more losses before Merrill started to climb back.
Merrill’s vulnerabilities should not have been a surprise to Lewis, either. Right after the agreement in September, he’d moved his accountants into the Merrill offices, and they knew about Merrill’s problems better than anyone. By the time Bank of America’s shareholders formally approved the merger on December 5, Thain felt optimistic that the two companies could successfully move forward. What he didn’t fully grasp was the extreme sensitivity involved in combining two cultures—the staid world of commercial banking and the comparatively high-flying world of investment banking. With the official takeover date scheduled for January 1, 2009, Thain was focusing a lot of his energy in December on taking care of his own people—specifically, making sure that $4 billion in bonuses were in place. There were reports that he also requested a bonus of $10 million for himself, stating that he deserved the large sum because he “saved Merrill” with the sale to Bank of America. In doing so he missed the mood of the company—and of the nation. He failed to see that with Merrill still bleeding, the bonuses might have been perceived by Bank of America shareholders and by members of Congress as terribly inappropriate. (It deserves note that to this day Thain denies asking for $10 million, but directors who were there told the media a different story.)
By December Lewis had grown deeply concerned. He later told me, “The losses began to really accelerate in mid- to late December. November was bad, but November was bad for almost every company in the business. And there was a point in mid-December that we said, ‘Hey, things are accelerating and we need to call for a material adverse change.’”
A material adverse change (MAC) is a legal contingency clause that allows an acquiring company to halt completion of a transaction if the status of the company it’s acquiring changes measurably, and that’s what Lewis was seeing.
“We went to the Treasury and the Fed,” he told me, “and we talked to them about that. And we jointly concluded that it would pose some systemic risk if the deal didn’t go through. They promised to assist us in getting it done and filling the bucket of capital that was taken away by the loss.”
“Did they say, ‘No, no, no, you can’t walk away from it?’” I asked.
“They said, ‘We strongly advise you that it is not in your best interest or the country’s best interest to walk away from this,’” Lewis explained. “And at the end of the day, we thought it was in our best interest and the country’s best interest to go ahead with it, because we still saw the long-term strategic benefits. And we thought the disruption caused by not doing it just outweighed calling the MAC.”
The government assist involved the promise of an additional $20 billion in stimulus funds. But Lewis could not contain a sense of doom as the announcement of fourth-quarter losses loomed. There was no way to sugarcoat the news: Bank of America posted a loss by Merrill of more than $15 billion.
Unquestionably, there were those at Bank of America who had the knives out for Thain. The bonus issue was bad enough, but then someone leaked an old story that put Thain in a very bad light. The story involved Thain’s start at Merrill Lynch a year earlier, when he had spent more than $1.2 million in the renovation of his office, including $131,000 for area rugs, a $68,000 antique credenza, a $35,000 commode, and a $1,400 wastebasket. This was the type of excess that might have been acceptable in the frothy days just past, but it did not go down well with taxpayers in the throes of recession. Never mind that it had happened a year earlier, before the crisis hit. The media slammed Thain, focusing on the $45 billion in stimulus funds that had landed in Bank of America’s coffers. The point got mangled but nobody cared: John Thain was viewed as the guy who spent a small fortune on office commodes and wastebaskets—and then demanded a $10 million bonus while the taxpayers wrote fat checks to his company.
In spite of the bad press, Thain did not feel the personal jeopardy that was looming on January 22. Shortly before noon, Lewis entered his corner office, his demeanor cool and unfriendly. He sat down and got right to the point. “Things aren’t working out. We’re going to replace you.” While Thain was digesting this bitter news, Lewis
