The Unraveling of Merrill & Bank of America
A few months after the shotgun wedding between Merrill Lynch and Bank of America, the top executives are unhappy and the union is in jeopardy unless BofA can get more relief from the government.
In early November 2008, just weeks after Bank of America agreed to purchase Merrill Lynch in a deal that would combine the nation’s largest commercial bank with the legendary brokerage firm that pioneered bringing small investors to the market, the relationship was already rocky. Now BofA is asking for billions more from the government or, it says, the marriage is off.
Just a few months ago, a meeting was held in Merrill’s midtown Manhattan conference center. There, about 50 of Merrill’s top brokers—executives who trade and invest money for some of the nation’s richest people—were scheduled to discuss BofA’s acquisition and what it meant for them, the firm, and their clients, with the man said to be the deal’s chief architect, Merrill CEO John Thain.
The meeting began promptly at 8 a.m. when breakfast was served. Normally such meetings between the CEO of a major firm and his top employees are jovial affairs, with lots of backslapping and hero worship. Not this one. The brokers were anxious and agitated—the sale had occurred about six weeks earlier, after investors started to unload Merrill shares the week that rival Lehman Brothers imploded. Lenders began pulling lines of credit, and Merrill would have followed Lehman Brothers into liquidation if it hadn’t found a buyer in Bank of America, whose tough-as-nails CEO, Ken Lewis, had lusted over buying Merrill, particularly for its brokerage sales force and the millions of investors it dealt with every day.
Thain clearly stated that he was “in the line of succession” to run the nation’s largest financial-services empire.
That was the good news. The bad news was that Merrill was sold at a fairly cheap price: $29 a share. The firm had traded at close to $100 a share in early 2007, and former CEO Stan O’Neal has said he could have sold the company to Bank of America in mid-2007 for around $90 a share, but the deal was rejected by Merrill’s board. There would be major cultural changes. Merrill—the firm whose mission was to bring “Wall Street to Main Street”—had just been bought by a commercial bank located in Charlotte, N.C.
John Thain sought to put those concerns to rest, according to two people with direct knowledge of the breakfast meeting. He told the group that the combined Bank of America and Merrill Lynch would be a powerful force in the high-reward business of managing money for the wealthy and the emerging wealthy. Of course the street was going through tough times, but with Bank of America’s capital, Merrill was now on firm footing.
And most of all, the deal allowed Merrill to retain a significant degree of independence. Top Merrill officials, such as brokerage chief Bob McCann and investment banking head Greg Fleming, were staying on, as a recently released organizational chart showed. More than that, Thain announced he was staying on—something that surprised many in the room, because the CEOs of acquired companies usually leave soon after a deal like this one is completed. In fact, just days after the merger was announced, chatter inside the Merrill executive suite was that Thain was plotting his exit.
Not so, Thain indicated during the meeting. He began talking about the great opportunities in store for the brokers—and for himself. He mentioned Ken Lewis’ age—61—and, according to one broker present, he clearly stated that he was “in the line of succession” to run the nation’s largest financial-services empire, something that shocked most of the people in the room. When the brokers left the meeting some three hours later, many were under the impression that Thain had said he believed he was going to replace Lewis as CEO.
But if Thain was at the head of the line of succession then, he has since fallen further back. Senior executives are bolting from the firm right and left (McCann and Fleming resigned just last week), and tension inside the ranks grows by the day, and much of it, according to people inside Merrill, can be attributed to Thain. A former Goldman Sachs executive, he came to Merrill after a stint at the New York Stock Exchange, where he was known as “I Robot” for his stiff mannerisms and top-down managerial style.
Since joining Merrill, he had brought in former colleagues from Goldman and the NYSE—paying the Goldman execs tens of millions of dollars in guaranteed bonuses during one of the worst years in Wall Street history. Though he inherited a mess of leverage and losses, many people I speak to say Thain continued to make things worse in 2008 by downplaying Merrill’s problems and its need to raise new capital. Some say they believe he waited to the very last minute to sell Merrill, when he could have received a better price much earlier.
Competitors are clearly trying to seize on the turmoil. Already Morgan Stanley has been busy trying to poach brokers from Merrill’s sales force, and last week’s announcement that Morgan Stanley and Citigroup are now in advanced talks to create a joint venture with their respective brokerage divisions means that Merrill’s would no longer be the largest; its 16,000 brokers would be competing against a sales force of roughly 18,000 if the deal goes through.
Inside Bank of America, senior executives tell me that Lewis is growing increasingly concerned about the management upheaval and Thain’s remarks about succession—and he isn’t happy. A spokesman for Bank of America declined to comment on Lewis’ feelings about Thain or the management losses, but he issued a statement summing up Thain’s chances of running BofA this way: “Regarding succession, Ken has said from the day the deal was announced in September that John Thain was a potential contender. He never indicated that he is the favorite and to suggest that would go beyond reality.”
As for Thain, who also declined to comment for this article, a Merrill spokeswoman said: “Your assertion is false that Mr. Thain has said he is the likely successor to Ken Lewis.”
All mergers are difficult to pull off because of the cultural differences between the firms, but the BofA/Merrill merger has been like watching a slow-moving train wreck—shares of Bank of America initially rose after the deal to $35, but have since tanked, and now are trading around $13. Much of that can be attributed to the lousy operating environment on Wall Street but also the internal conflicts. Last week, the rating agency Standard & Poor’s called McCann’s departure a “cause for concern,” adding that “Merrill's brokerage unit was likely the main attraction for [Bank of America] in completing the acquisition, and if brokerage attrition picks up, the acquisition becomes less valuable."
If you think this is nothing more than Wall Street insider baseball, think again. As the nation's largest brokerage firm, Merrill handles the investment accounts of millions of people; Bank of America holds more bank deposits than any other US bank. Keeping both of these companies stable is a key to bringing stability back to the financial markets. It’s one of the main reasons, during the weekend Lehman imploded, that officials from the Treasury and the Federal Reserve had implored Merrill to make a deal with a bank that had the wherewithal to weather future financial crises.
There has been nothing stable and confidence-building about watching these two firms work out their differences. Inside Bank of America, people I speak to say they can’t believe what they have gotten into. Merrill was forced to be sold to BofA because of investor concerns over its exposure to soured real estate debt and the business model left by former CEO Stan O’Neal. Thain took over in late 2007, but through 2008, he may have made a bad situation worse, first by downplaying the firm’s need to raise capital, and then by trying to change Merrill’s long and storied culture and by hiring top lieutenants—Tom Montag and Peter Kraus—from the outside, namely from the hated Goldman Sachs.
Kraus, for his part, began working at Merrill just weeks before the BofA merger, and left just a few weeks later, earning a bonus of $25 million for about a month’s work. (New York Attorney General Andrew Cuomo is said to be investigating the Merrill bonus controversy, including the payment to Kraus.)
Meanwhile, Montag is keeping his $34.9 million bonus and has a major position with the new firm—another sore spot inside Merrill. More recently, Thain tried to cash in as well, asking the Merrill board to grant him a $10 million bonus for 2008. After a strategic leak—the likely source, according to several senior Merrill officials, an angered board member who couldn’t believe he/she was put in such a position to approve a bonus during a year of turmoil—and intense public criticism, Thain reversed himself.
And while McCann and Fleming didn’t like each other very much—they were rivals for the CEO job—they had recently found common ground in their dislike of Thain; one person close to Fleming said he recently had a screaming match with Thain. People close to both men, who declined to comment for this article, were quick to point out that the two left Merrill not because they didn’t like Bank of America’s management but specifically because they couldn’t get along with their boss.
Others are now thinking about leaving Merrill. Of course Wall Street’s problems mean there are fewer jobs at the competition, but people who worked for McCann and Fleming are in the sweet spot of Wall Street’s emerging business model of providing wealth-management and financial advice to small investors and large companies. Contrary to popular belief, it was not Thain but Fleming and his team of bankers who initially saw the beauty of the BofA/Merrill deal—combining the largest bank with the largest brokerage firm and creating a wealth-management colossus.
After some prodding, Thain ultimately agreed to approve the Bank of America deal, blowing off a possible partnership with Morgan Stanley or Goldman Sachs, something that he deserves some credit for making happen. But deals of this magnitude aren’t just made on paper—they are done by working with people, by creating a sense of partnership, and promise for the future. In that sense, the Bank of America-Merrill deal is far from over. In fact, based on recent events, it may never be completed.
Charles Gasparino appears as a daily member of CNBC's ensemble. Gasparino, in his role as on-air editor, provides reports based on his reporting throughout the day and has broken some of the biggest stories affecting the financial markets in recent months. He is also a columnist for Trader Monthly Magazine, and a freelance writer for the New York Post, Forbes, and other publications.