Bank of America Smackdown!

UPDATE: Bank of America shareholders on Wednesday voted narrowly to strip Ken Lewis of his chairmanship. He'll stay on as president and CEO.

Bebeto Matthews / AP Photo Shareholders will vote on BofA CEO Ken Lewis' fate today (odds 50/50). But Charlie Gasparino says Lewis' battle with former Merrill chief John Thain has devastated the credibility of both men.

Investors don’t have a lot of confidence in our financial system, and with good reason. Bernie Madoff conducted his scheme right under the nose of regulators for 20 years. The big Wall Street firms imploded because they invested billions of dollars in toxic mortgage debt while telling the world they were fine. Ken Lewis and John Thain are two more reasons to stay out of the markets until further notice.

Both men have been in the news a lot lately. Thain, the former CEO of Merrill Lynch and ex-chairman of the New York Stock Exchange (where he earned the nickname “I Robot” because traders there thought he was impossible to communicate with), was fired by Lewis after Bank of America bought the once-storied brokerage firm during the dark days of the financial crisis last year and discovered things were a lot worse at Merrill than he thought.

Watching these guys go at it is kind of like watching old World War II footage of battles between Germans and Russians; you want them both to lose.

Since that time, they have been bickering—much of it in public—about who knew what and when about the huge losses Merrill announced to investors after the deal closed and the now-infamous bonuses that were paid out just before that announcement.

Both men have given testimony to New York Attorney General Andrew Cuomo, who is investigating the bonus fiasco, and from what I gather, each is praying that the other somehow gets charged in the matter. Wall Street is taking sides; there are those who think Lewis can’t be trusted and has a history of dopey deal-making (he bought troubled mortgage lender CountryWide Financial before Merrill) and others who say a stunt like paying out bonuses before the losses are announced is something Thain wouldn’t think twice about doing. And Bank of America’s shareholders will have their say today when they vote to decide whether to keep Lewis as CEO.

I’m not taking sides. In fact as far as I’m concerned, watching these guys go at it is kind of like watching old World War II footage of battles between Germans and Russians; you want them both to lose. To understand why both men should be treated by investors as if they are about to spread the swine flu, you have to go back to some time in the late summer-early fall 2007. Back then, Merrill wasn’t imploding, but its investment in toxic mortgage debt was becoming well-known on Wall Street. Still, I'm told by people with direct knowledge of the conversation that Merrill’s then-CEO Stan O'Neal went to his board and told them Lewis would offer $90 a share for Merrill Lynch (nine times what it eventually would eventually agree to pay).

Merrill’s board rejected the offer because they thought it was too cheap, these people say. O’Neal was eventually fired for the losses tied to those mortgage investments and replaced by Thain, who, after rewarding himself with a new $1.2 million office complete with a $35,000 “commode” as previously reported by The Daily Beast, he began cutting costs so Merrill could live within its means and assuring Wall Street that he had everything under control. Throughout the next year, Thain’s public statements were continuously contradicted by the facts: He said Merrill didn’t need to raise more capital to plug holes in the firm’s balance sheet when it did. He said the firm was on the way toward repairing its damaged balance sheet when it wasn’t.

A year later, with O’Neal gone and Thain in charge, Merrill President Greg Fleming once again revisited the possible deal, then sending out feelers to BofA about a possible merger several days before the Lehman Brothers meltdown weekend, probably because he knew Lewis’ lust to grow BofA into a major global investment bank, based out of Charlotte, N.C., would obscure his business judgment.

These accounts undermine the popular myth that Thain brilliantly sold the troubled Merrill to a healthy suitor. Sorry John, it was Fleming who pushed for the deal while you were weighing hookups with Morgan Stanley and your old firm, Goldman Sachs. But they also contradict the notion that Lewis was misled and then forced into buying Merrill by a lack of time to perform due diligence on Merrill's troubled assets or because of arm-twisting by Fed Chairman Ben Bernanke and then-Treasury Secretary Hank Paulson. Lewis had a full year to think about Merrill, and the last time I looked, he didn’t work for Bernanke or Paulson, but BofA shareholders.