Wall Street's New Bonus Outrage

The disclosure that near-bankrupt Merrill dished out a staggering $209 million for 10 bankers takes this scandal beyond the absurd—and possibly into criminal territory. Will the Feds prosecute?

Chip East, Landov / Reuters

The curious case of the obscene Merrill Lynch bonuses just keeps getting more and more disturbing and harder and harder to fathom. For instance, there is the small matter of the whopping $33.8 million bonus that Merrill supposedly paid to the suave European Andrea Orcel, Merrill’s top investment banker, who allegedly generated, according to the Wall Street Journal, some $550 million in revenue in 2008. The Journal attributes the number to “people close to him” and offers nothing close to any further substantiation.

If it comes out that Ken Lewis knew about the Merrill bonuses—as Thain has alleged—then once and for all it will be time for him to relinquish his job.

But this number is beyond absurd. It is almost inconceivable for a single investment banker to generate that much revenue in an entire career, let alone in a single year and one that happened to be one of the worst in Wall Street’s history. It might be one thing if Orcel were some kind of Mike Milken-like figure who controlled the junk-bond market from an X-shaped desk in Beverly Hills, but that does not seem to be what’s at play here. Who even heard of Orcel before we were told of his absurd compensation? At least Milken was the junk-bond king when he got his $550 million pay package in 1987. It is unlikely that even Felix Rohatyn, the legendary investment banker at Lazard Frères (and then Lehman) who has spent all but three or so of the past 60 years doing deals and at times produced 80% of the partners’ revenue at Lazard in a given year, has come close to generating $550 million of revenue in his career. When Rohatyn started at Lazard in 1949, he was paid $32.50 per week. When Ace Greenberg started at Bear Stearns that same year, he was paid the same $32.50 per week.

While we do know that Orcel received a one-time bonus of $12 million for advising Royal Bank of Scotland on one of the all-time worst deals in history—its 2007, $101 billion acquisition of ABN Amro Holding NV. Sir Fred Goodwin, the RBS chief executive who engineered the ABN deal has been sacked, of course, and RBS is now a ward of the state. Orcel, meanwhile, remains head of international corporate and investment banking at Bank of America. (Did anyone say, accountability?) If Orcel did indeed generate the $550 million in revenue his friends say he did, then perhaps he is entitled to his $34 million, since a rule of thumb in the industry has been that bankers get bonuses equal to about 10% of the revenue they generate. Still. Orcel’s revenue number cries out for some serious justification. Show me proof, I say! Until then, as a former M&A banker during a time when the best among us generated $50 million in revenue, I remain incredulous.

What makes the disclosure that Orcel and his top nine buddies at Merrill hauled out a staggering $209 million for their work at the firm and that an additional 149 bankers were paid $3 million each and scores more were paid $1 million each, is that no one else on Wall Street was getting anywhere close to that much money. Everywhere else on Wall Street in 2008, a modicum of TARP-induced prudence reigned. At Goldman Sachs, which was profitable for the year, the top executives got bonuses of zero. At Morgan Stanley, CEO John Mack took a zero bonus for the second year in a row. Jamie Dimon, CEO of JPMorganChase, took a zero bonus along with his $1 million salary. Vikram Pandit, the beleaguered CEO of Citigroup, was paid $1, which seems about right.

But at Merrill Lynch, the party raged on. While it is true that none of Greg Fleming, the former Merrill president, Robert McCann, the former Merrill head of the Global Private Client Group, or Rosemary Berkery, the former Merrill general counsel, received a bonus for 2008—they all resigned from the firm in January—and while it is true John Thain, the former Merrill CEO, ended up with no bonus for 2008—despite his efforts to the contrary—and was fired in January by Ken Lewis, the CEO of Bank of America, blame for this bonus debacle must be apportioned. Unfortunately, Lewis blames Thain. And Thain blames Lewis. Bank of America has also filed a petition to keep the compensation data confidential.

Fortunately, though, Andrew Cuomo, New York state's attorney general, seems determined to get to the bottom of what happened here and why. He has taken the closed-door testimony of both Lewis and Thain. Last night, according to the Journal, Cuomo subpoenaed Orcel, Peter Kraus, the former head of strategy at Merrill, and Thomas Montag, the head of global sales and trading at Merrill and at the merged firm. (Thain recruited both Kraus and Montag from Goldman Sachs in 2008. Kraus got paid $29.4 million for about three months' work; Montag got $39.4 million for five months' work plus an additional $50 million in stock to compensate him for what he left behind at Goldman.)

Cuomo is zeroing in. If his investigation reveals that Lewis knew about the Merrill bonuses—as Thain has alleged—then once and for all it will be time for Lewis to relinquish his post as CEO of Bank of America. He should have been fired already for his decision in 2008 to overpay for both Countrywide Financial and Merrill. How he has hung on in the wake of the collapse of Bank of America’s stock is another mystery Cuomo might want to investigate. What Cuomo might also want to put on his agenda is how the Merrill board, with Lewis’ acquiescence, could have authorized the billions of dollars of bonuses for Merrill’s bankers and traders in a year where the firm lost $27.6 billion, took $10 billion of TARP funds and was days away from bankruptcy. When he gets the answer to that question, it may well be time for the federal prosecutors to act.

William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, will be published by Doubleday in 2009.