Was John Thain Talking Bull About Merrill?

Just how much did Merrill Lynch CEO John Thain know about Merrill Lynch’s losses when he sealed the deal with Bank of America—and when did he know it?

I’ve been covering the financial crisis since its inception in the late winter/early spring of 2007, and at no time in my career have I ever seen more misleading comments from the Wall Street elite. But for my money, no firm treated the truth with more contempt than Merrill Lynch, which is why Friday’s “surprise” $15 billion loss, shouldn’t be such a surprise to anyone who has followed the company and its public statements about its deteriorating financial condition.

Back in mid-2007, when the first losses from mortgage bond investments began to surface, Merrill told the market its exposure to the toxic stuff was limited. Those losses did indeed mount to a level where CEO Stan O’Neal and much of his team responsible for the investments were forced to step down, but his successor didn’t appear that much more willing to level with investors about the true nature of the firm’s financial condition. At just about every juncture since he took over the firm, John Thain has downplayed the firm’s financial troubles only to be proven wrong. Upon taking over, he bragged about Merrill having $80 billion in liquidity; in a few months, that “liquidity” appeared nowhere to be found. At one point he even said that Merrill didn’t need to raise more capital and just a few weeks later he admitted just the opposite by raising more capital.

“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.”

Thain’s crowning achievement was supposed to be a complex deal to sell most of Merrill’s bad mortgage debt to a hedge fund, at a bargain-basement price of around 22 cents on the dollar. That deal was going to set Merrill straight, once and for all putting the company on firm footing by forcing it to wipe the bad debt off its balance sheet and take all its losses so it could start anew. The message from the CEO’s office was pretty simple: Merrill had bitten the bullet and was no longer holding mortgage bonds at significant levels to cause the firm further problems.

But as Wall Street discovered Friday, that wasn’t quite right either as Bank of America announced that it was forced to seek government money because in the fourth quarter, Merrill’s bad investments blew a hole in its balance sheet. That, combined with some trades that went bad, led to a $15 billion loss for a firm who built its brand promising to bring “Wall Street to Main Street.”

Supporters of Thain will tell you that the deterioration in the markets over the past year since he has taken over as CEO has been swift and significant. In other words, what is true one day, isn’t true the next. His new bosses at Bank of America seem, at least publicly, to buy that excuse—and they tell me at least for now Thain remains part of the BofA team. “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,” according to one person at BofA who is close to Lewis. “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.”

In conference call on Friday, Lewis certainly seemed to signal that Thain was going to be at the firm for the foreseeable future. When asked about Thain's continued role, Lewis said he's "happy John Thain has assumed a major role at Bank of America."

But behind the scenes, the tension has been rising. First, it involved the departure of senior executives at Merrill, investment banking chief Greg Fleming and brokerage chief Bob McCann, who made it no secret that they were leaving the new combined firm because of their disdain for Thain rather than any tension with their new bosses at Bank of America.

A Merrill spokeswoman had no comment on Thain, nor did a spokesman for BofA about Thain’s record. My guess is that Lewis can’t get rid of Thain because if he does, he opens himself up to too much criticism, but at some point he’ll find a way and Thain will be gone. Lewis has been fending off accusations that he didn’t do proper due diligence and rushed to buy Merrill in mid-September because of his long-time desire to purchase its 16,000-broker sales force. Some investors in BofA believe they should have been told of Merrill’s financial troubles before they voted to approve the transaction in early December.

Lewis’s people are saying there was nothing to tell them—that the scope of the mess at Merrill wasn’t known until after the vote. A spokesman for Lewis tells me that Thain’s story goes something like this: As soon as he was aware of the massive losses in mid-December, he reported them to Lewis, who then went to the government for bailout money.

All of which may be true as I suppose there’s some truth to the notion that the markets are so volatile and fast moving, CEOs deserve the benefit of the doubt even if they are making seemingly definitive statements that their firms are healthy that turn out to be wrong. In other words, they aren’t lying when they tell you the future looks bright. It does, before things change and the future isn’t so bright anymore.

But Wall Street, as these CEOs know, is a volatile business, so it begs the question: Why make such predictions in the first place? The reason they do gets to the heart of what Wall Street is all about and what investors and the public sometimes forget. For all the analytical modeling and math geniuses who come up with the complex mega deals that people read about every day, the financial business is a simple one, it’s mostly about selling things—stocks to investors, loans to individuals and corporations, and the sale of the firms themselves as stable places to do business with.

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And when you sell stuff, you often cut corners with the truth. That’s what Wall Street did over the past two years, to such a degree however, that they won’t be able to sell themselves to investors for a very long time.

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.