Thain was shaken to the core. They were only twenty-two days into the merger, and he had agreed to stay because he was convinced he could make a positive difference for the two companies, especially during the transition process. Fourth-quarter results aside, he was already seeing good results in January. He couldn’t believe that Lewis was firing him just as they were getting started.
The minute the news broke, I was on the phone trying to reach Thain. I was eager to hear his side of the story. Finally, that weekend, as I was packing to leave for Davos, Switzerland, to cover the World Economic Forum, Thain returned my call. He agreed to do an on-air interview—his first—on Monday.
As my plane crossed the ocean to Switzerland, I thought about the questions I would ask. I vividly recalled the critical weekend in September when the future of the financial system seemed to hang in the balance. I remembered thinking how courageous Thain was that weekend—stepping up and making a bold move to save his company. Was this just a clash of cultures? Was it a warning about the level of toxic assets still buried in the banks? Was it a story about Wall Street not getting it?
“John,” I said, at the start of our interview, “Merrill paid out $4 billion in bonuses to Merrill’s top players. How can you justify losing $15 billion in a three-month period and still be paying out bonuses at a time when you were forced to sell to a larger player, and you were going to the government for needed capital? How do you justify paying out all of that money?”
His answer was similar to what I had heard many times over from others on Wall Street. “If you don’t pay your best people, you will destroy your franchise. Those best people can get jobs other places, and they will leave. So the necessity to maintain the franchise is why you really have to pay some amount of bonuses, because, as you know, Wall Street people’s salaries tend to be relatively small. And their bonuses are the vast majority of their compensation for the year.” I knew that many listeners would find the explanation arrogant and tin-eared. Here was a company that had lost more than $15 billion in the fourth quarter, and Thain’s defense of bonuses in light of the company’s problems would not garner much support from the public.
I also asked Thain about his expensive office renovation. At the very least, this was a public relations problem; at most, it betrayed a gross insensitivity.
“It was an environment where jobs were being cut and salaries were being cut,” I said. “And the firm was reporting all of these losses. Did it occur to you at some point over the process to say, ‘This is probably not the best judgment. I better put this off’?” I asked.
He began defensively. “Well, first of all, this was a year ago or actually a little bit more than a year ago, in a very different economic environment, and a very different outlook for Merrill and the financial services industry. It was my office. It was two conference rooms and it was a reception area. But it is clear to me in today’s world that it was a mistake. I apologize for spending that money on those things. And I will make it right. I will reimburse the company for all of those costs.”
I was curious, though, as were many people, about what was so wrong with former Merrill Lynch CEO Stan O’Neal’s office that such an expensive renovation would be necessary. His explanation was unconvincing, and he squirmed as he tried to explain that O’Neal’s office was outside the standard set by Merrill. “It really would have been very difficult for me to use it in the form that it was in.” He seemed to be implying that the place was a dump. Who believed that? Actually, I later learned that O’Neal was much more egregious in his office spending, insisting on having clear glass walls and a very modern decor with white and glass everywhere. It seemed to me he’d gotten off easy, considering the level of debt and lavish spending on his watch.
Thain was clearly embarrassed by the situation. “With twenty-twenty hindsight, it was a mistake,” he said. “I’m sorry that I did that. And I intend to fully reimburse the company.”
But it was too late for Thain to fully make amends. The story would tarnish him, although he would reemerge before long as the CEO of troubled lender CIT Group.
I was also curious about Ken Lewis’s role in a deal that was looking more problematic by the day. Although the sale of Merrill Lynch to Bank of America had been considered good news in the midst of a catastrophic weekend, many people were troubled by the rapidity of the agreement and wondered how Lewis could possibly have done due diligence in the space of forty-eight hours. I also wondered about the personal dynamic between two very strong-willed, ambitious men whose cultural differences ran deep. I’d heard that since the acquisition, Thain avoided Charlotte whenever possible, and the two men spent little time getting their management and future plans in sync. One glaring example: Thain had no idea that Lewis had tried to pull out of the deal on the MAC clause in December.
On February 10, I caught up with Lewis in Washington, D.C., when he joined me for an interview on CNBC. I put it to him bluntly. “Clearly, the losses at Merrill have been stunning: $15 billion in the fourth quarter alone. Once you saw the losses piling up, how did it happen that you went forward? Investors want to know, what were you thinking when you allowed this deal to go through?”
Lewis was
