John Thain's $87,000 Rug
UPDATE: In a Daily Beast/CNBC exclusive, Charlie Gasparino reveals how CIT’s new CEO, John Thain, spent over $1 million and hired the Obamas' decorator to redecorate his office at Merrill Lynch in 2008—even as the firm faced a financial crisis. After this story was originally posted last January, he announced plans to repay Merrill for the renovations.
In early 2008, just as Merrill Lynch CEO John Thain was preparing to slash expenses, cut thousands of jobs and exit businesses to fix the ailing securities firm, he was also spending company money on himself, senior people at the firm say.
According to documents reviewed by The Daily Beast, Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.
Big ticket items included $87,000 for an area rug, four pairs of curtains for $28,000, a pair of guest chairs for $87,000 and fabric for a "Roman Shade" for $11,000.
The other big ticket items Thain purchased include: $87,000 for an area rug in Thain's conference room and another area rug for $44,000; a "mahogany pedestal table" for $25,000; a "19th Century Credenza" in Thain's office for $68,000; a sofa for $15,000; four pairs of curtains for $28,000; a pair of guest chairs for $87,000; a "George IV Desk" for $18,000; six wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a "Roman Shade" for $11,000; a "custom coffee table" for $16,000; something called a "commode on legs" for $35,000; a "Regency Chairs" for $24,000; "40 yards of fabric for wall panels," for $5,000 and a "parchment waste can" for $1,400.
The documents also show that Thain signed off on the purchases personally. "Labor to relamp the six wall sconces" cost $3,000, and Thain authorized the payment of another $30,000 to pay the expenses Smith incurred in doing the work. Thain has hired Smith—whose celebrity client list includes Steven Spielberg, Michelle Pfeiffer, Cindy Crawford and Sir Evelyn de Rothschild—to design and decorate his private residences. They include a Manhattan apartment at 740 Park Avenue, and his 10-acre mansion in Rye, NY.
Thain was tapped to run Merrill Lynch as the firm suffered massive losses from investments tied to the depressed real estate market under his predecessor Stan O'Neal, who was ousted in late 2007. Those losses continued through 2008, forcing Thain and his management team to sell the brokerage firm to Bank of America in mid-September or face near certain liquidation as investors fearing further losses began pulling lines of credit and other financing.
Just last week, Bank of America announced that Merrill has suffered an unexpected loss of $1.79 billion for the fourth quarter of 2008, nearly collapsing BofA's purchase. Bank of America CEO Ken Lewis said that without $138 billion in government assistance, including the infusion of $20 billion from the federal government he would have pulled out of the Merrill deal, which was approved by BofA shareholders in early December.
Thain has come under pressure in recent weeks after several top executives at Merrill, including brokerage chief Bob McCann and investment banking head Greg Fleming, abruptly resigned from the firm citing differences with Thain. People close to Lewis say his relationship with Thain was further strained by the recent massive loss. Lewis himself has faced withering criticism for rushing the buy Merrill for $28 billion after less than two days of due diligence.
"I don't want to convey to you that Ken was delighted in mid-December when he found out about the losses, in fact he was pissed at Thain," one person at BofA who is close to Lewis told The Daily Beast earlier in the week. "He's not doing anything about Thain now because it isn't clear whether Thain should have told him sooner. So at least for now, Ken is sticking with Thain." (A spokeswoman for Thain denied a rumor inside Merrill that Thain is poised to step down from the firm.)
It's unclear how the disclosure of the personal expenses will effect now Thain's position. Thain signed off on the purchases in January, people close to Merrill say, when Merrill was still an independent firm and when some analysts believed the company was poised for a rebound with Thain as the new CEO. Thain came to Merrill after a largely successful stint as CEO of the New York Stock Exchange, where he converted the not-profit entity to a public company. Before that, he was a long-time executive at Goldman Sachs, where he served as former CEO Hank Paulson's No. 2.
Still others say spending so much company money on personal items shows incredibly bad judgment on the part of Thain since Merrill was in the middle of a financial crisis that ultimately led to its demise as an independent company. At the time, Thain was preaching the virtues of cost control, telling employees to reduce expenses including car services, entertainment and travel. In addition to the personal expenses on his office, documents show Thain 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. Drivers of top executives are often paid about half that amount.
"If this is accurate it has shades of Dennis Kozlowski's $6,000 shower curtain," said investor Doug Kass of Seabreeze Capital Management, in a reference to former Tyco CEO Dennis Kozlowski who was convicted of fraud and is serving prison time for improperly spending millions of dollars on personal items. While there is no evidence that what Thain did is either illegal or of the magnitude of the spending by Kozlowski, Kass said "Merrill was on the fence and Thain came into save the company. It's still a lot of money and there is no rationalization for something like this."
UPDATE: This article originally incorrectly reported BofA's fourth quarter loss. The number has since been revised.
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.