The Unraveling of Merrill & Bank of America

Bebeto Matthews, file / AP 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.