John Thain, former chief executive of Merrill Lynch & Co, has been ousted from Bank of America Corp after the bank discovered surprise losses at the brokerage it bought three weeks ago.
Bank of America Chief Executive Kenneth Lewis expressed dismay last week about the scope of losses from mortgages and toxic debt on Merrill’s books. Investors and analysts said the losses made Thain’s position as head of global banking, securities and wealth management more tenuous.
“Ken Lewis flew to New York today, met with John Thain, and it was mutually agreed that his situation was not working out, and he would resign,” Bank of America spokesman Robert Stickler said.
The departure of Thain, 53, is effective immediately. He could not be reached for comment and Merrill was unavailable for comment.
Bank of America stock slid 14.2 percent in afternoon trading.
Brian Moynihan, 49, the bank’s general counsel and a former investment banking chief, will replace Thain. Global markets chief Tom Montag, 52, will report directly to Lewis and help set strategy. Bank of America said the terms of Thain’s departure would be disclosed later.
Thain and Lewis cobbled together the merger after less than 48 hours of negotiations in mid-September, the same weekend Lehman Brothers Holdings Inc slid into bankruptcy.
But Lewis threatened to back out of the deal following shareholder votes at both companies last month after it became evident Merrill’s finances were much worse than expected.
Lewis said U.S. regulators pressed him to complete the deal. Last week, the government agreed to inject $20 billion in capital, and to share in losses on $118 billion of debt.
Bank of America said Merrill lost $15.31 billion in the fourth quarter, separate from Bank of America’s own $1.79 billion quarterly loss — its first in 17 years. The bank also slashed its dividend to a penny per share.
“This is a huge crisis of credibility,” said David Dietze, chief investment officer at Point View Financial Services in Summit, New Jersey. “Someone has to fall on a sword.”
Complicating the matter was that Merrill announced bonuses in late December, earlier than usual and just before the $19.4 billion merger closed on January 1.
New York Attorney General Andrew Cuomo is investigating the possibility that Merrill awarded “large, secret, last minute” bonuses, a person familiar with the matter said Thursday. Cuomo’s office declined to comment.
Also, CNBC reported Thain hired well-known Los Angeles interior designer Michael Smith to redecorate his Merrill office a year ago and ran up a $1.22 million bill, including for a $35,115 “commode on legs” and a $1,405 parchment waste can.
Smith’s designing company could not be immediately reached for comment. Bank of America did not confirm the report.
Lewis, who has spent some $130 billion on major mergers to build Bank of America, has raised the hackles of investors who believe the Merrill purchase was too many.
Pessimistic analysts have speculated the government may eventually need to nationalize one or more large banks if the global recession and credit crisis get worse.
Bank of America stock “is remarkably cheap by traditional measures,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. But he said, “The investment is still fraught with risk because of the potential for nationalization or the need for dilutive capital raising.”
Shares of Bank of America were down 43 cents at $6.25 on the New York Stock Exchange, far below the 52-week high of $45.08 set last February 1.
Reports of Thain’s office redecorating came on the heels of $12.2 billion in net losses at Merrill in the second half of 2007, as writedowns on mortgages and other toxic debt began to mount. Thain became Merrill CEO in December 2007.
The reported outlays recalled heavy spending on personal items by senior executives at other companies, including a $6,000 shower curtain owned by former Tyco International Ltd chief Dennis Kozlowski, who is in prison for fraud and other charges.
U.S. Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, commenting on the report, said the office decorations would reflect “bad judgment” on Thain’s part.
“I know John Thain and like him, but that was terrible precedent he set and a terrible decision,” Shelby told reporters. “I wouldn’t want my money spent that way.”
Thain was considered a candidate to become U.S. Treasury Secretary if U.S. Sen. John McCain had defeated Barack Obama in the race for the White House.
By joining Bank of America, Thain immediately became a top candidate to succeed Lewis, 61, but analysts have long speculated that he would not want to be in a subordinate role for long. Before running Merrill, Thain was CEO of NYSE Euronext.
Lewis and Thain negotiated the merger in less than 48 hours, on the same weekend Lehman Brothers Holdings Inc slid into bankruptcy.
Thain has received credit for possibly saving Merrill from a similar fate. but he was later pilloried in the media for not being more forthcoming to Bank of America.
Lewis, meanwhile, has been criticized by investors and analysts for overpaying, and not renegotiating the terms once Merrill’s losses became evident.
“There are no winners in this situation,” said Michael Holland, founder of money manager Holland & Co.
Several lawsuits were filed this week against Bank of America, claiming it rushed into the merger too quickly and failed to disclose the losses sooner.
“If they can make it through this, two to three years from now we’ll see an IPO of Merrill,” said William Smith, CEO of Smith Asset Management. “We’ll go back to how it used to be. Banks are banks, brokers are brokers, and investment banks are investment banks.”
(Reporting by Elinor Comlay, Juan Lagorio, Deepa Seetharaman, Jonathan Stempel, Phil Wahba, Dan Wilchins and Lilla Zuill in New York and Susan Heavey in Washington, D.C.; editing by John Wallace and Jeffrey Benkoe)