breaking the bank

John Thain


As CEO of Merrill Lynch, he sold it to Ken Lewis' Bank of America in late 2008, at a time when Merrill was being hit hard by the subprime mortage meltdown. Thain stayed on to manage Merrill, but within a few weeks was fired by Lewis as both Merrill and BofA sank deeper into the red. This is the edited transcript of an interview conducted on April 17, 2009.

So it's Friday, [Sept. 12, 2008], and you and lots of other bankers get a phone call to come down to the Fed. ...

I remember very well, because it was a rainy Friday afternoon. I was in Merrill Lynch's Midtown facilities, and I live in Westchester, so I was trying to get out of the city early, because the traffic is always bad when it rains on a Friday night. And I got a phone call about 5:00 from Terry Checki at the [New York] Fed, saying, "Be at the Fed at 6:00 that evening." ...

Did you have any sense of how bad Lehman was doing, what kind of shape they were in that Friday night?

We knew from comments in the street that they were having liquidity problems. And so the main focus was on their liquidity position, how bad was it, and that's what we expected to discuss when we got to the Fed.

But no real sense that maybe they were on the precipice, that this was one of those critical junctures for them as we headed into the weekend?

Well, I, as you probably know, was part of the group that rescued Long-Term Capital [Management, a hedge fund that was bailed out by a group of Wall Street firms at the behest of the New York Federal Reserve in 1998]. And so to get this kind of a phone call, "Be at the Fed at 6:00," on a Friday night was actually very similar to what we got in the case of Long-Term Capital, where they locked us in a room and said, basically, "You can't come out until you fix this." And so the expectation was that this was pretty serious.

... What's it like to go in there? Who's there? What was the vibe?

I went by myself, and for the most part, the CEOs of the large investment banks and commercial banks were all there by themselves. And we got into a conference room. And Hank Paulson, the Treasury secretary, and Tim Geithner, the head of the New York Fed -- and a collection of other people, but those were the two main participants -- said to us that Lehman was in very serious financial difficulty. They did not think that they could open for business on Monday morning. We collectively had to find a solution for this, and -- this is the important part -- the government was not going to provide any form of assistance.

“[Lewis'] shareholders were angry. ... He said, 'You're gonna take the blame for the fourth quarter.' I guess in his view, someone had to take the fall.”


I was surprised with such a flat statement, because it really eliminated a lot of degrees of flexibility. But it was stated then that the government was not going to provide any form of assistance.

You know Hank Paulson about as well as anybody. Could you tell by his demeanor and aspect that he really meant it?

Yes, he absolutely meant it. ... Hank is a very straightforward guy. He says what he means. And I think it was clear to all of us that that was the position they were going to maintain.

Were you surprised that they'd done what they did with Bear?

... What happened to Bear Stearns happened very quickly, very unexpectedly. It shows you the importance of liquidity and how investment banks in particular have much more difficulty with their liquidity -- and that's how they get into trouble -- than their equity or their solvency. And in the case of Bear Stearns, they were dealing with a situation over a weekend just like this, but where there really had been no precedent.

So he needed to do it. Paulson and the government needed to save Bear, or didn't really know whether they needed to or not.

Yeah, I think that the second argument is really the one that, whenever we face these situations, we look into the abyss and say, "Well, do we really want to find out what will happen if one of these entities goes bankrupt?" And that was the same thing in Long-Term Capital: No one knows for sure, but the potential consequences are very bad. And so I think the decision to rescue, to some extent anyway, Bear Stearns, or at least not allow it to go bankrupt, was probably the correct one.

So when you're sitting in that room and Hank and Geithner say, "Don't expect the government to help," how important is that? … What does it mean to you that Lehman might go down?

On Friday night, it wasn't clear that that was going to happen. So we basically divided into three groups. One group was to figure out, how large was the potential hole in Lehman's balance sheet? And it was really focused on their commercial real estate assets, because before you can construct a solution, you have to figure out how much money are we talking about.

The second group was focused on the structure that we might use to rescue them. And then the third group was focused on, well, what if we couldn't rescue them? So we really spent Friday organizing ourselves, dividing ourselves into groups, and then tasking everyone to come back Saturday morning with a view as to how much money is it likely to take to rescue them, and then what kind of structure could we use to do that? ...

Many people were worried that there [would be] a sort of domino effect on the street. ... Is that the way you felt about it?

That view that there was a domino effect and that this was going to spread was really much more prevalent on Saturday and Sunday, as it became more and more clear that Lehman wasn't going to get rescued, and that it was more and more likely that Lehman would go bankrupt. And so, as the view developed that Lehman was likely to go bankrupt, then the concern got into, "Well, what are the consequences of that?"

... [It's rumored that] you looked around the room and you saw the guy from Lehman and said some version of: "There but for the grace of God go I. Next Friday I could be sitting in this room."

That's mostly true. I didn't really say that out loud. But here is what happened on Saturday morning. The first group that presents their views is the group that's focused on, well, how much money will it take? How big is the potential hole in Lehman's balance sheet?

And there were different views, but the range of numbers was between $15 and $25 billion. It was kind of centered around $20 billion; that it would take about $20 billion to fill the hole in Lehman's balance sheet. And that number, even for the group that we had there, is a very large number. Just to go back to Long-Term Capital, we provided $4 billion of capital among the group in Long-Term Capital's case.

And it was on Saturday morning, as I listened to the discussion about $20 billion, plus or minus $5 [billion], what the structures might be, how that might be shared, that I came to the conclusion that this was no longer about saving Lehman. This had shifted to becoming, "What do I do about Merrill Lynch?," because I had the view that, if Lehman were to go bankrupt, that the consequences to the market and the financing markets would be severe, and it could threaten Merrill Lynch's viability. And I did not want to be the equivalent of Lehman the following weekend, sitting there. And so I really changed my thought process and just focused on, "All right, what can I do to make sure that Merrill Lynch doesn't go the way of Lehman?"

Were you aware, Friday night, and even Saturday morning, that [CEO] Ken Lewis and Bank of America were in the hunt with Barclays, ... they were looking at the books, they were in deal mode with [Lehman CEO] Dick Fuld and Lehman?

We were all collectively aware that Bank of America was talking to Lehman.

But even Saturday morning, you didn't know yet that Lewis had decided they were not going to play?

I didn't know that Saturday morning. That's correct.

And presumably Fuld didn't either. But Fuld was not at these meetings.

No, Fuld was never there. Or at least he was never in any of the meetings we were at.

Why? Do you know?


[We've heard that Paulson] ... has a meeting with you in the morning and encourages you to think about selling Merrill, or at least a piece of Merrill. ...

Yeah. … Saturday morning, I was sitting in the meetings. We were talking about, "Well, how much money will it take, and what structures could we use?" And it was still focused on Lehman.

It was at that time that it became reasonably clear to me that the likelihood that we could actually do this, that we could actually rescue Lehman, was small, and that if the government continued to maintain that they weren't going to provide any form of support, it was likely that Lehman was going to go bankrupt. And that really changed, as I said, my focus [to], "All right, well, what does that mean for Merrill Lynch?" ...

And you have to remember that, you know, I had only been the CEO of Merrill Lynch for nine months, so the last thing in the world that I want to do is sell the company, because no matter what happens, if I sell Merrill Lynch, I lose my job as the CEO. And so to decide that Lehman's likely to go bankrupt, and I really have to focus on what's the right thing to do for Merrill, its shareholders, its employees, and I have to place that phone call to Bank of America, to Ken Lewis, that was a hard decision, because I know if we go forward with it, it's going to result in me losing my job, which I liked.

But I don't think that we had any choice. ... So I placed a phone call to Ken Lewis. Hank Paulson didn't know I placed that phone call. And there was really no pressure on Saturday to place that phone call. As a matter of fact, since I believed Bank of America was still talking about Lehman, I was a little concerned that me placing that phone call might decrease the chances that the Lehman deal goes forward, and that that might be a negative.

Now, it turns out, when I talked to Ken, that he had said that they were not going forward anyway. But I placed that phone call, really, without any pressure. ... I walked outside of the Federal Reserve and called from my cell phone, standing outside on the street.

And it's his private number?

His home. I called him at home. ...

Does he seem receptive? Does he seem happy to hear from you? Is he surprised?

I don't know if he was surprised, but he was happy to hear from me. I said, "Ken, I think we should talk about a strategic arrangement." He said, "I'd like to do that." And he said, "I can be up in New York in a couple of hours." And we agreed to meet at their corporate apartment in the Time Warner Center at 2:30 in the afternoon.

... Do you bring aides? Does he have aides?

No, it's just the two of us. And so I proposed to him that we would be interested in selling a 9.9 percent stake in Merrill to Bank of America, and we would want them to provide us with a large credit facility. And his response was, "Well, I'm not really very interested in buying a minority stake, but I would be interested in buying the whole company." And I responded that I hadn't come here to sell the whole company. And he said, "Well, that's what I'm really interested in."

And we talked a little bit about the strategic fit among Bank of America and Merrill Lynch, why a transaction might make sense. We both agreed very quickly that there was a lot of strategic value to the combination, that it made a lot of strategic sense. And we agreed, between the two of us, that we would basically pursue both paths. We'd pursue a 9.9 percent stake; we'd pursue a 100 percent stake. But he made it clear that it was the 100 percent stake that he was really focused on.

That's a big step for you. ...

I believed at that time I needed options. I needed to make sure that I could protect Merrill's shareholders and employees and the franchise. I needed options, and this was one option.

Did he tell you why he had walked away from Lehman?

He talked about the fact that, without any form of government assistance, he couldn't see that the reward would be worth the risk.

He told us $60 billion was the hole that he saw. Sound right?

"I don't know" is the answer. That wasn't the number that we were focused on, although we only were focused on the commercial mortgage portfolio. So it's possible that there were other asset classes that they had seen in their due diligence that we weren't really focused on. But at least the discussion at the Fed, among the collective group, was more like $20 to $25 billion. ...

And all through Saturday, even when you're hearing things, even when it looks like Lehman's at the precipice, Paulson never wavered? It never felt like maybe the government would get involved if Lewis walks away?

No, neither Hank nor Tim ever indicated there was any flexibility on the government's part.

Does it surprise you, by the way, given the magnitude of what it would mean for Lehman to go away?

Well, the answer is yes. A little bit of this is with hindsight. I was very afraid of what the consequences of a Lehman bankruptcy would be. And I think that I was correct, and the consequences were very, very severe. I think $20 to $25 billion, even $30 billion of government support would have been a much better option than allowing Lehman to go bankrupt.

You know Hank Paulson. Why didn't he do it? He must have known what you knew.

I can't answer that for him. You have to ask him or Tim. They had gotten criticized over the Bear Stearns transaction. There was a lot of pressure coming out of Congress to not continue to rescue or bail out Wall Street firms. There was a lot of concern about moral hazard and what were we saying about moral hazards. So there were certainly arguments about why they maintained this position. ...

... So you're sitting with Lewis, and he says: "I'm really not here to buy a minority position. I'm here to buy the company." What's his aspect? Had you known him before?

I had met him a few times. I didn't know him well. But if you looked at the businesses of Bank of America, they touch a huge number of retail consumers in the United States. They have a great retail banking franchise. They have a great credit card business. They had, through Countrywide, a great mortgage business. But they didn't have a financial advisory business, and Merrill Lynch's financial advisers are the best, arguably, in the world.

And that fit -- the financial advisers with the other Bank of America businesses -- is something that made a tremendous amount of strategic sense. And then we also bring a world-class investment bank, a much more global platform and a good sales and training business as well.

Yes, and it was clear in talking to him, for me, that he lusted after this. … He indicated to me that he really wanted it. Could you feel that, at that moment?

I'm not sure that he was displaying an excessive amount of emotion, but he clearly was very interested.

You've articulated the value of Merrill to him. And the value, from Merrill's point of view, of a Bank of America alliance, other than the fact that it maybe kept you alive, was what?

There were certainly very attractive synergies. So the ability to cross-sell their credit cards, the ability to cross-sell their mortgages, the ability to cross-sell both their retail banking services but also their commercial banking services -- you know, many of the customers are the same, both on the high-net-worth side and on the corporate side. And so there were a lot of very good synergies, but the primary driver of this was making sure that we protected the shareholders and the employees. ...

You'd only been there nine months. Merrill was in some distress. ... What was the state of play at Merrill when you came in, Mr. Thain?

I started in December 2007. Prior to that, I had been at the New York Stock Exchange; I was the CEO of the Exchange. I was approached by two of the board members. Stan [O'Neal, former Merrill Lynch CEO,] had already been allowed to resign. Merrill had really been without a CEO for at least a couple of months. Their approach to me was that this is a great franchise, which I agreed with. So it had a great wealth management business; it had a very good investment banking and sales and trading business; had a global footprint. It had a great brand.

It had pretty severe problems on its balance sheet, and it had lost a lot of its senior management talent, but they were recruiting me because I understood mortgages, and a lot of their problems on their balance sheet were mortgage-related. The attraction to me was that it was a franchise that I believed I could fix.

There were a lot of problems on the balance sheet. The balance sheet was over a trillion dollars, probably a couple hundred billion dollars of bad assets, which of course then deteriorated dramatically over the course of the year. I had to rebuild the senior management team. I had to rebuild the risk-management functions because whole risk-management functions had failed.

But I was optimistic that, given probably a couple of years, this was a great franchise, that we could repair the damage that had been done, and I accepted the job under that basis. Now, whenever you take a job where you know there's a problem, the problems, of course, tend to be worse than what you thought. But it really was the environment and the collapse of the financial system, and [those] ultimately didn't give me the time that it would have taken to clean it up.

[From summer '07 into '08, we saw] the bog fire that had been burning under the mortgage interest market broke through the ground and was fully enflamed. Could you tell that that was happening as you were trying to put the company back on good footing?

We knew there was, as you said, a fire in the bog. And Merrill had already reported billions of dollars of losses, both in the third quarter and then in the fourth quarter. And the decline in asset prices had already begun.

What was, I think, not knowable at the time was how much asset prices would decline, and then what that asset price decline would do to the financial firms -- not only Bear Stearns, but Fannie Mae [Federal National Mortgage Association], Freddie Mac [Federal Home Loan Mortgage Corp.], AIG [American International Group] and then ultimately Lehman.

What's that like to sit there and watch that happening?

It's a little bit like you're in a very attractive boat that has a hole in it, and you're trying to bail, but more water is coming in faster than you can get it out. And that's really what we were in over the course of, really, all of 2008. So we were constantly selling assets, raising capital, improving our liquidity. … But it was, as asset prices continued to decline, those asset-price declines generated continued losses. And even though we were selling assets, there were so many of them that were bad and getting worse, you were in a constant [state of] trying to catch up.

... Did Lewis know the state of play at Merrill?

He hadn't yet done the due diligence, but I wasn't sitting there because I thought things were all nice and rosy. So I was there because I was worried about what the impact would be. And it was pretty obvious that the Lehman bankruptcy was going to be bad for Merrill Lynch as well as for the industry. ...

What do you figure the company is worth in share price, and what do you think he thinks it is? ...

You have to go back to what was happening in that period of time. All of the share prices were under [an] enormous amount of pressure. And the shorts, whether justifiable or not, were driving the prices of all the financial institutions down. And so Merrill's stock price had declined precipitously over the course of weeks. It's hard to know exactly what the right price is, but it was pretty clear to me that our share price at the time was artificially depressed because of the environment.

What was it at the time?

On that Friday it was around $17.

And what, he pays $29?


That's a pretty good deal for you. You must have felt pretty good about that.

... I had mixed feelings. Twenty-nine dollars a share was about $50 billion. That offer was clearly a good deal for Merrill's shareholders; it was good for Merrill employees; it was good for the customers. Again, as I said before, by selling the company, I lose my CEO job, which I'd only had for nine months, which I liked.

So it was the right thing to do, but I still regretted the fact that that was what was necessary. I would have much preferred to be the CEO of Merrill Lynch and run the business and clean it up and fix it.

... Do you talk to Paulson about it after you and Lewis have a kind of "let's look under the covers" conversation? And is Paulson happy about seeing the two of you get together?

The answer is yes, because at the time, up until I met with Ken, I wasn't sure what the status was of the Bank of America-Lehman discussions. So I wanted to make sure that Hank knew that I was talking to Bank of America so that he didn't think I was in any way damaging the chances that Bank of America would actually buy Lehman.

Now, they had already decided before I even met with them that they weren't going to go forward, and actually, I believe that they had sent their teams home. But I did have a conversation with Hank sometime on Saturday afternoon to say that I had started these discussions, and he was very supportive of that.


I think he shared my view that Merrill was likely to come under enormous stress the following week, and for me, since, at least in my view, if they weren't going to rescue Lehman, they also weren't going to rescue Merrill, and I needed to find a solution for Merrill before we got into that same position.

Were you worried about what would happen to Merrill, knowing what you knew about the black hole that might be created by Lehman's bankruptcy, even with a Bank of America relationship? ...

No, not really, because the problems are liquidity-driven. So my concern was not that we had a large hole in our balance sheet, because we were pretty aggressive at marking things to market. ... Once the tie-up with Bank of America was announced, that really eliminated any real risk of liquidity problems. And then actually using your domino theory, it then moved to the next person, which was Morgan Stanley.

You got out from under it. You got out of the spotlight.

Yes, exactly.

The deal teams are over looking at things. And the way the story goes, at least according to Lewis, all moments like that are fraught anytime two companies are coming together. ... But from his point of view, this one was especially fraught, that there was something about bonuses. ....

Not exactly, no. When you put a transaction together in 36 hours, it is very frenetic, and there's lots and lots of pieces. I don't remember any particular issue on the bonus piece holding it up. The ability to pay the bonuses was a part of the deal, and that was negotiated. But it wasn't negotiated with either Ken or me. I would say, besides the price itself, the material adverse change [MAC] clause was heavily negotiated. And the ability to pay the bonuses was negotiated, and, as we all know, that Bank of America agreed that we could pay up to $4.5 billion of bonuses, and the timing of that would be prior to the deal closing. And the expectation at the time, and really throughout the entire period, was the deal would close around the end of the year. …

... Was there any other contact with Geithner or Paulson over that weekend? …

There was a meeting on Sunday morning -- and I think this timeline gets confused a little bit, but there was a meeting on Sunday morning where Hank in particular was very strongly encouraging me to make sure that I got a transaction done prior to the opening on Monday. And so they were very concerned that if Lehman were to go bankrupt what the implications might be for Merrill. And so they very much wanted us to get a transaction done.

What form does that "strongly encouraging" take? How strongly?

You know, in a meeting, it is, "John, you'd better make sure this happens."

That straightforward?

Mm-hmm. …

Any conversations between you and Lewis, either at the Time Warner building or your people and his people during those 36 hours, about a role for you at Bank of America in the future?

No, none. As a matter of fact, Ken himself said publicly that that was one of the differences between prior conversations, is that it wasn't about me; it was about doing the right thing for the company, for the shareholders, for the employees, for the clients. And there was no agreement over that weekend about any role for me.

Did you wish there had been? Did you try to talk about that?

No, we never really talked about it. We didn't talk about my role till a week or two afterward. ...

Could you see yourself running Bank of America?

As I said, I gave up my CEO job running Merrill Lynch, which I liked, that job. I had never really considered being one of Ken Lewis' direct reports. But over the course of the couple weeks afterward, they very actively solicited me and convinced me that there was a good role for me, that there was a good job for me, that I did have the potential to be a successor. And ultimately I decided that that was a role that I would play.

Part of the reason I did that was that I thought the transition would be smoother, that I could really help with the whole transition process; that, in many ways, I owed it to the people of Merrill Lynch to help them get integrated into the Bank of America organization. And particularly some of the people who I had brought in, I felt an obligation not to just say, "OK, deal's done, I'm leaving," [but] to really help with that process. ...

On that Sunday night when the toasts finally happen, Lewis makes it [out as] a sort of "We toast it, but we toast it through gritted teeth." Did it feel that way to you?

I think it was only that we were tired. Everyone was happy that the deal was done. The lawyers were bantering back and forth about lawyer type of things, and it just took longer than it should have. ...

Any hard feelings from your point of view?



Yeah. ...

What are the implications of that deal for Ken Lewis, from your perspective? ... What does Bank of America represent, now that they have, at least what he's called, the thundering herd?

I think it's the last piece in his strategic vision of where he wanted Bank of America to be, and I think that it allowed Bank of America to compete with really anyone in the world. So it really filled out a portfolio of businesses that positioned them to be able to compete with any financial institution in the world.

Basically he's king of the world in the banking sense.

Well, he has the financial firepower, the mix of businesses, to compete with anyone.

His vulnerabilities at that moment, from your perspective?

I think, as in any transaction, it's execution. And then, even then, as the outlook for the economy was softening, he did, in his other businesses, have lots of exposures to an economic slowdown, whether it's on the credit card side or on the home equity loan side or on the mortgage side. And so his core businesses were susceptible to an economic slowdown. But I think that there was a lot of optimism that this was a great strategic transaction, which I think it was. ...

Oct. 12, Hank calls a lot of you guys, many people on their cell phones, reaches them on a Sunday afternoon, says, "I need you to be in Washington tomorrow afternoon for a meeting at the Treasury." ... What does he say the meeting is about?

He said, "Be at the Treasury at 3:00 tomorrow." I said, "Well, what's the topic?" "You'll find out when you get there." I said, "Well, who's coming?" "You'll find out when you get there. See you at 3:00." Click.

So you get there, and what do you find out?

There's the same group of nine of us on one side of the table. Besides that, [Fed Chairman Ben] Bernanke's there, and Hank and [Federal Deposit Insurance Corp. (FDIC) Chair] Sheila Bair is there. Then there's a whole army of other people there, and they go through in a very rapid way that each of us is going to take this taxpayer money, the TARP [Troubled Asset Relief Program] money, they've allocated out among the different institutions. We're all going to do it for the good of the country, for the good of the system, and it's not really discretionary.

What did you make of that?

I think that what they were doing was actually the right thing, and I actually think it worked. If you go back to that day, and this has changed over time, but what they were trying to do then is stabilize the system. So they were trying to inject capital into the financial institutions so that the marketplace would have confidence in those financial institutions and the system would stabilize. ...

The idea that that capital injection was so that the financial institutions could make more loans was something that evolved afterward. That wasn't their intention at the time. And so when they kind of forced that capital into those financial institutions, I think that they did, in fact, stop the deterioration in the market, and, in fact, did stabilize it.

There was an argument. I think Wells Fargo stepped up and said, "Wait a minute," and others went back and forth. ...

[Wells Fargo CEO Richard] Kovacevich was certainly more vocal than anyone else about whether or not this was really necessary. But we all knew -- and actually someone said this -- we all knew that we were going to do it. And so whatever the discussion was about whether it was necessary or not, we all were going to do it. It was more understanding what exactly the terms were, because the terms weren't all that well explained. And so we really had to understand, what were the terms? How was this all going to work? And it was much more along those lines.

Terms were very simple, right? Take the money. Take it or take it. And there weren't many strings attached.

Well, there's a question of how did the warrants work, and how could you pay back the money, and what did it mean for executive compensation? And so there was a whole series of questions about that.

People were worried, of course, about what it means to have the government as a business partner.


To put it mildly.

As things evolved, they became more worried about that.

Some people have said to us, that's the moment of nationalization. ...

It is the beginning. As I said, I think that they accomplished what they wanted to do, which was to stabilize the system. And then the question is kind of, what happened afterward? But I think you're right; that was the beginning.

What happened afterward?

Those financial institutions actually did stabilize. It didn't unfreeze the market, and there were still lots of market aberrations that were going on. But at least as it related to the viability of the top financial institutions in the United States, I think that eliminated that concern.

But from the point of view of the banks, it also meant they had partners in the government. It also meant the executive compensation demagoguery and many other things were in the immediate future.

That all developed. It wasn't that that was totally fleshed out on that Monday. That all developed over the course of the next couple of months. ...

[Let's talk about the culture clash] between Merrill and Bank of America. What was it like for the Merrill guys? …

As I said before, the strategy made a lot of sense, and there were huge opportunities to cross-sell products, and everyone was excited about that. ...

But in any transaction like this, there are cultural differences. And I would say that the biggest issue is, Bank of America is a scale operation. They have massive scale. Investment banking is very people-specific. So having the very best health care banker, having the very best financial institution banker -- you know, there's a big difference between having the very best individual people rather than just having lots of people.

That is the area where there has been some culture clash, where the understanding that just scale isn't sufficient if you really want to be one of the top investment banks in the world.

And that would, of course, have implications for compensation.

It would, yes.

In what sense?

Well, if you want to have the very best investment banker, you have to pay them. And you have to pay them top dollar.

And that's hard for somebody like Lewis at a big bank to understand?

Well, I don't know. You have to ask him. ...

How were those kind of problems manifesting themselves in October, November and December as the merging was taking place?

I don't think there was any particular problem in that time frame. I think we're starting to see some of that problem now. ...

When did you start to get a sense that the losses were clearly worse than you had anticipated for the fourth quarter?

I don't agree with that characterization, because we expected that the impact of Lehman's bankruptcy would be very bad on the market. So the fact that we were losing money I don't think was a surprise to anyone. And the positions that we had, which Bank of America had complete access to in their whole due-diligence process, and the relationships between different types of assets all dramatically broke down. So asset prices fell, and the relationship between things that would normally hedge other things broke down. So, for instance, the relationship between cash, bonds and credit default swaps -- all of those things contributed to a very bad fourth quarter.

And was Bank of America inside your books? ... Would they have known what was happening, what the projections were, how bad things actually were because of the Lehman collapse and what else had happened in the market?

Yes, absolutely. I believe in being totally transparent. They had acquired us. We were completely transparent with them. They had inserted the person who had been their chief accounting officer -- he became the acting chief financial officer for the Merrill businesses. We generate a daily profit and loss statement. They were getting that daily profit and loss statement, so they knew about the losses at the same time we did.

Which was when?

We get an update every day.

So they would have known all the way along?

All the way along.

Step by step.


So that when it comes time for them to talk to the shareholders that first weekend of December, or that shareholder call, they had a pretty good idea that things were bleak at Merrill and in the economy then.

I don't think there was any surprise that we, Merrill, would have experienced losses in this environment. The market was in complete chaos. The credit markets were not functioning. And this was public knowledge.

And at the same time, ... there's discussions about bonuses, about how much is going to be paid, about all of it. When were they aware of that and the plans with the bonuses?

The bonuses go all the way back to Sept. 15. So as part of the negotiation of the transaction, we negotiated the price; we negotiated the material adverse change out; and we negotiated and they agreed to the payout of bonuses. So in the merger agreement, which Ken Lewis signed, they agreed that we could pay up to $4.5 billion of bonuses and that those bonuses would be paid out prior to the deal closing. And the expectation at the time was that the deal would close somewhere around the end of the year.

That was part of the deal that they made in September. As we went over the course, the next couple of months, we had ongoing dialogue with them about the bonuses. They first asked us to change [PDF] the $4.5 billion to $3.5 billon, which we did. In the merger agreement, the structure of the bonuses was that they would be 60 percent cash and 40 percent stock. They asked us to change that to 70 percent cash, 30 percent stock, which we agreed to. ... When we signed the agreement, we anticipated using our stock. They asked us to actually substitute their stock, which we agreed to. They asked us to use their stock valuation date as of Jan. 2, which we agreed to. And they had access to, name by name, bonus numbers, and they changed them. So they made changes to them. They suggested changes then, which we of course made.

So there was complete transparency with them starting from September when they agreed to the bonuses, all through the period of time until they were ultimately paid.

... Could all of this have been happening without top management at Bank of America, including Ken, knowing it? Is that possible?

The two people who are the most involved were Steele Alphin, who's his chief administrative officer [at Bank of America], and a person who reported directly to Steele. And he signed the merger agreement. So I don't see how he wouldn't at least have known that there was an agreement on the bonuses.

In December, ... they start talking MAC. They start talking, "We want to break out; we want to close the deal." When do you first hear about that?

Jan. 5.

After it's all said and done.


They don't cut you into the discussion early.



You have to ask them that question. It would be supposition on my part. We negotiated the material adverse change clause. It specifically excluded market movements. So my first reaction would have been that they don't have the right under the way the contract works to exercise the material adverse change clause. My understanding is the Treasury agreed with that. But they never brought me into the discussion.

Had relationships deteriorated to some extent negatively by then, from your point of view?

No. There really was no negative discussion at all. The whole integration process was going forward. There are kind of daily updates on the integration teams. They're all going forward. So no, there was really no apparent problem.

As far as you know, you're still one of the heirs apparent.


You and Lewis talk periodically?

Yeah, periodically.

And no hint?

No hint. ...

... When you look back at that time period, what was going on?

The losses were probably bigger than they had expected. They themselves were losing money, which I don't think they expected, in their own businesses. And I guess they were concerned about what that impact would be on both their capital ratios and then ultimately on their share price.

Is it possible that what Lewis is really doing is he doesn't really want to get out of it; what he really wants is more from the government?

Yes. ... This is a transaction he's always wanted to do. The fourth-quarter results don't change the strategic benefit of the transaction. I would have been very surprised if he actually didn't want to do this deal.

So what was he doing?

You can speculate as well as I. I wasn't party to the discussion.

What does your speculation tell you?

I can't really answer that any better than you. As I said, I think that they were concerned about their capital ratios, and the incremental taxpayer funding obviously improved those. After the fact, I believe Ken Lewis himself has admitted that taking the extra $20 billion was a mistake. If they'd asked me, I would have told him it was a mistake.

But at the time, he may have felt he needed it.

Again, they didn't include me in those discussions.

Why would Paulson and Bernanke have been so worried about letting the deal fall apart? What would have been the impact on the economy if the Merrill-Bank of America deal had fallen apart in December?

The economy was already in a very steep decline. I don't know if it necessarily would have had any particular impact on the economy. It certainly had the potential of having a negative impact on Merrill's shareholders, employees and customers. And so if the deal would have broken apart, we would have had to figure out what we were going to do, and we would have had to find an alternative. And it's very hard to speculate about exactly what that would have been.

But if Lehman's collapse is a contributing factor to what happened in that week in September, and everything's kind of teetering, can you imagine a potential Merrill collapse and the breaking apart of this deal in terms of confidence, if nothing else, in the marketplace?

Remember, a lot of things had happened subsequent. In September, when Lehman went bankrupt, there was no TARP. There was no taxpayer funding or capital injections into these financial institutions. That came later. [But] by the time we get to December, there now is a history of providing not only the first round in October but then subsequent rounds where institutions needed it. So if the deal had broken apart, I certainly would have worked to construct some new type of transaction that didn't result in the failure of Merrill Lynch. And I think we probably could have done that.

But of course you can imagine Paulson and Bernanke's tremors, at least, at that moment at the idea that this thing might fall apart. Here we are, coming up to a new administration. Here we are at the end of December. Obviously you could make the argument that Mr. Lewis had them over a barrel.

It certainly wouldn't have been good. But I also believe that they didn't have the right to get out of it.

So when you hear that there's been a loan and there's been an additional infusion, what do you think?

I was shocked, shocked that they would have tried to use the material adverse change out, shocked that they would not have talked to me.

What did it say to you?

It said to me that they were much, much more concerned about their own capital position and about their own shareholder reaction and that they felt that they needed to bolster their capital position in a way that I would not have thought was the case.

... At some moment in the telephone conversation with [Lewis], somebody apparently threatens, on behalf of the government, … that if they don't accept the infusion, that senior management could be changed and the board of directors could be changed, and that the company serves, in some ways, at the pleasure of the government, and that this is, in fact, a sort of next shoe to drop in the crypto-nationalization of Bank of America. ... Would you agree with that?

I don't know. I wasn't part of that conversation. I don't know if that happened or not.

If it did, would it worry you?

We've already seen where an institution has taxpayer money, the government believes that they have the right to have an influence all the way up to who the CEO is and who the board is.

And why does that matter?

It's a fundamental change in the role of government in private corporations.

And is that good or bad?

I think from the point of view of corporate America, having the government determining who the CEO is and who the board is, is not a good thing. On the other hand, where you have government funding into these companies, the government has rights, because they are in fact providing this funding, and they have to look out from the taxpayers' point of view. So it's just a question of getting the balance right.

... Lewis begins to understand the extent to which being in bed with the government is a very bad thing for the way he wants to run his business.

And you see firms like Goldman Sachs trying to repay the government money for the exact same reason.

What reasons?

For trying to escape the government oversight of who the CEO is, who the board is and how the compensation policies work.

... What happens to you in January, from your point of view? Suddenly we're hearing about John Thain, a bad guy, who has $20,000 commodes and stuff. Suddenly that's all out in public. Why does that happen? ...

This all goes to the day that I was fired. So Ken Lewis calls up the day before and says, "I want to see you at 11:30," the next day. Doesn't say why. And up until that point in time, there had been no issues or concerns between him and me. There had been no comments about how I was doing in the 21 days I worked for Bank of America. Actually our businesses, the businesses that reported to me, were very profitable in those 21 days.

The integration process was continuing along, and Ken comes to see me. It's already leaking on CNBC why he's coming to see me.

You see it?

Yes, I see it. ... I have CNBC on in my office, so I can see the headlines are that I'm going to get fired. And Ken says to me: "Things aren't going to work out. You are going to take the blame for the fourth-quarter losses, and you can never succeed me, and we're going to replace you." Conversation takes two minutes.

What do you say?

I said, "Well, the losses in the fourth quarter, a lot of them were simply because of the market dislocations, and they will reverse themselves." And he ignores that, and, you know, there really wasn't very much for me to say, because this wasn't a negotiation.

I've seen the tapes. He's flying. [CNBC's on-air editor] Charlie Gasparino is saying, "He's coming up." You see it kind of as it's happening in real time.

Yes. And I did say to him, I said, "Well, I guess we know where the leak came from," since I obviously didn't know why he was coming. And his response was, "We don't leak things."

So how did they know?


And then the tarnishing of John Thain's reputation, the stuff about the office excesses, where does that come from?

That gets leaked at the same time. They say three things. One is that these bonuses were done by me, were a secret and were accelerated, which of course is not true. And they have subsequently retracted, since it was part of the merger agreement. There are constant discussions with them about them. And as we've covered, they were completely part of that. And part of my reputation is my integrity. Part of my reputation is that I am a transparent, open, honest guy. And we were always transparent, honest and open with them.

The second allegation is that somehow they didn't know about these losses. That's not true. They had daily P&Ls [profit and loss statements]. They learned about these losses when we learned about them.

And then the third is my office. I joined Merrill Lynch in December 2007. There was no government funding then. There was no financial meltdown then. And when I joined, I found my office and the suite around my office configured in a way that didn't fit how I like to do business. One of the rooms had been turned into a private gym. I like to work at my office, not work out, so we had to pull out the private gym. The office itself had a large built-in desk in the middle of the office, so you had no way to receive clients. I like to use my office to receive clients, to meet with people in the company, to see customers. You couldn't do that the way the office was set up.

So renovating the office and refurbishing it, and setting it up in a way that I could do business for years going forward, was the thought process at the time.

And the commode and the other stuff is all what? How do you explain that?

The individual items, the cost of those individual items, when I found out about them, I was embarrassed, and I did what I thought was the right thing, since those items were clearly excessive. … I reimbursed the company for all of the cost.

It feels like a hit job to me, the way that it all comes out, all at around the same time. Does it to you, too?

It's hard to explain how all of this could happen on the day that I get fired, especially things like the office, which were more than a year old.

Hard to explain, unless what?

Unless it was, as you say -- I'll use your term -- a hit job.

So why does Lewis have to fire you? ...

First of all, I don't think he has to. And I believe it was a bad business decision, because part of my being there helped the transition, helped keep the senior people. And I think that firing me after 21 days will make the transition harder. And there are senior people who will leave that wouldn't have left.

So why does he do it?

I think from a business decision, it didn't make sense. He had announced his earnings, or lack of earnings, the Friday before. They'd also announced the deal with the government, the extra $20 billion, on that Friday before. The share price was under extreme pressure. His shareholders were angry. He didn't say this to me other than he said, "You're going to take the blame for the fourth quarter." Someone, I guess in his view, had to take the fall.

Someone besides him.


How on the precipice, by your calculation, was his job at that moment?

I have a different view about how to deal in crises. The transaction still made a tremendous amount of sense. Long term, I think it will be very successful. The fourth quarter and whatever the next couple of quarters are, are not what are going to define whether the transaction made sense or not. Twenty billion dollars of incremental government money I think was a mistake. I think he admits [that]. But again, it's not going to define whether the transaction is a good transaction or not.

I think the right way to deal with a difficult situation is to pull together as a team, to be cohesive and say: "This is going to make sense. We're going to prove that it makes sense. We're all going to work together to do this going forward." I don't think throwing someone under the bus is a good strategy. But I wasn't the one making that decision.

When you look back on the chapter, September to there, ... what happened there? What does it tell us about the bank? What does it tell us about the crisis? What does it tell us about the country?

Well, I think one of the things that you see is, if you have the right leadership, you can, in fact, come up with solutions that make sense for shareholders and employees and clients. So what we did between Bank of America and Merrill Lynch on that September weekend was a good thing. As things transpired, in particular as Bank of America took more government money, I think that that calls into question, what is really the role of private institutions? What's the role of government? And is that a good use of taxpayer money?

I continue to believe that the transaction will be successful. But some of the actions that were taken in January, and in particular some of the statements that maligned me and that weren't true, were completely inappropriate.

And the systemic effect of what happened, can you feel one, or is it just a momentary argument that happened between a couple of bankers?

Well, no. There are big implications for our country going forward about this whole crisis and the role of government in financial institutions and the role of the regulatory structure in financial institutions and how compensation works in financial institutions, the levels of compensation, structure of compensation. There will be a lot of changes in how our financial markets function, how they're regulated, how they're overseen coming out of this whole crisis. ...

[What about] the reports that the reason for the [fourth-quarter] losses was not only legacy assets, [but] there were other deals being made? Respond to that allegation.

Merrill's losses in the fourth quarter, the operating losses, were almost entirely from legacy positions that had been there really since the beginning of the year. Some of the losses were accounting-related, where there was a $2.3 billion goodwill write-off. There was a $650 million charge for a litigation settlement. But the operating losses were almost entirely from existing positions and from the market dislocations that were occurring in that environment.

And the allegation that Merrill traders were out having a field day because there were no long-term implications for what they were doing? They were about to be part of Bank of America, and they could just take a flyer?

Those are not true, those allegations. And if anything, we were continuing to do what we had done all year long, which is simply shrink and sell assets.

... There are critics of yours within the old Merrill that still blame you for not recognizing the danger of the legacy assets enough in the year before and [who] feel that if you had realized the danger more, Merrill wouldn't have been in the position they got into.

From the very beginning when I started in December 2007, it was clear that Merrill had an excessive amount of toxic assets, and we were continually selling those as fast as we could over the course of the year. As we sold them and as prices continued to fall, we always had to be replacing the capital that we were losing. But there was never any hesitation to sell assets as quickly as we could. …

Your relationship with [Paulson] is fascinating to me, by the way, going all the way back. ... How was it at Goldman? You really were with Hank, close to Hank all the way along, yes?

Yes. And the relationship continued to be good, and, you know, Hank, although making it clear what I needed to get done, he was also still very supportive.

So would you think of him as a mentor at some point in your career? ...

My relationship with him really developed later in my career, because I never really worked directly for him. But he was someone who I spent huge amounts of time with, and was very helpful to me in my career and afterward.

How do you characterize Hank Paulson, the man at Goldman Sachs?

He was a person who took charge in a difficult environment for Goldman Sachs. So it was difficult internally. It was a difficult market environment. Goldman Sachs was in the process of going public; the market disruptions at the time delayed that. And he provided the leadership for the firm coming out of the public offering and then going forward that I think was very important to its success over the course of the next, you know, 10 years. ... He's a very driven, very focused, very results-oriented guy, and he provided the leadership that the firm needed.

And when he becomes secretary of the Treasury, does he change? Do you notice him change through this crisis?

No, I don't. He continues to be very focused, very driven, very decisive and trying to make sure that he's accomplishing what needs to get done.

Did you talk to him after your travails in January? ...

Yes. ... He expressed sympathy with the outcome and the fact that, in his view and many others' view, what happened to me wasn't fair and wasn't right. ...

He said that.


Did he say why he thought it happened?


Ken Lewis says that something happened between the shareholder vote and the time he goes to Washington and asks for additional support, and that something really bad happened at Merrill. ... What is going on in the middle of December, between the shareholder vote and what Ken Lewis says is something so bad that he has to go to the government to get additional support? ...

You know, there's always -- and this is true for all trading-oriented firms -- somewhat of a tendency for traders to be conservative at the end of the year. But the marks that the traders use at the end of the year are checked by the financial people. They're checked by the accountants. There's a lot of ways to make sure that they're not overly conservative. I don't have any particular knowledge about any issue at the end of the year with Merrill, and I certainly don't think it had any material contribution to the loss.

But if they happened, were there people from Bank of America who would have known, who would have seen, who would have observed it happening?

The marks at the end of the year were all reviewed by Bank of America people, and the acting CFO [of Merrill] was Bank of America's chief accounting officer. So Bank of America had complete access to what the marks were and what the positions were.

Ken Lewis tells us that in the time between the Dec. 5 stockholders' meeting and his going to Washington and asking for the get-out-of-jail clause, something substantial changed. What would it have been, do you think?

I don't know what he's referring to. If you look at what actually happened in the fourth quarter, October was the worst month, which is not surprising, because it comes right after the Lehman bankruptcy. We lost about $7 billion in the month of October. November was somewhat better. We lost a little over $5 billion. And on an operating basis, in December it was slightly better, but about the same as November. So the December numbers were about $5 billion.

Now, there were two accounting charges in the fourth quarter. One was a $2.3 billion goodwill write-down, and the other was a $650 million litigation settlement. But December was about the same as November, and October was by far the worst.

So should he have been surprised by anything that happened, that would have been revealed in, let's say, the middle of December?

Well, I can't answer as to Ken himself. But Bank of America and the acting CFO, who came from Bank of America, got daily P&Ls, and they knew everything at the same time we knew it about what the results were for the fourth quarter.

When you're on vacation in Vail, [Colo.,] around Christmastime, the way the story goes, you get a phone call from Hank Paulson. ...

It's actually when I was on my way to Vail. I did get a call from Secretary Paulson, and he was obviously interested in talking to me about what was going on in Bank of America, but he didn't realize until he placed the call that I didn't know. So it was sort of an awkward call, because once he realized I didn't know that they had gone to the government for more taxpayer funding, then he couldn't talk to me, so he didn't tell me. So the conversation was short, because I wasn't aware what Bank of America was doing.

Did you wonder what that was all about?

Yeah, because he called me, but didn't have any particular topic. He asked me how things are going, how's the merger going, and I said fine. And it was obvious to him I didn't know that they were talking about using the material adverse change out or talking to the government about more money. But he then didn't want to be the one to disclose that to me, and he didn't.

It must have been stunning to him that you didn't know; surprising to him at least.

As I said to you before, it was stunning to me when I found out that they were doing this and didn't tell me.

[Here we are in April; Bank of America and Goldman want to give the money back. The administration is saying:] "We don't care about saving banks. ... If they're too big to fail, we'll go in, and we'll make them bite-size. We'll regulate them." ... Where are we right now? What's going on?

I think we're in a very difficult spot right now, because it's not just about the government injection of taxpayer money into these financial institutions. Even if they pay the money back, they still have an implicit government subsidy, because they are, in fact, too big to fail. So we've proven that you cannot allow any of these large financial institutions to really go bankrupt.

And so unless there's a mechanism that changes that, they will still have an implicit government backstop, and paying the taxpayer money back won't really change that. And they've also been able to access government-guaranteed funding in terms of longer-term debt. So they're getting subsidies several different ways from the government. And it's not just paying the taxpayer money back; that subsidy has to be dealt with.

When I picked up The New York Times this morning, for example, and … not only do the banks want to give the money back, but the profits are up for the banks, ... does it mean that the crisis is over? What do I take from all of that?

First of all, you can ask 10 people this question, and you're going to get 10 different opinions. And I don't claim to know any better than anyone else. But I see unemployment still going up, people still losing their jobs; I see housing prices still falling. And I don't believe that the economy or the financial institutions are going to get better until we see those two things change.

So if unemployment is going up, that means consumers are losing their jobs. It means that credit cards, home equity loans, and consumer spending is going to stay weak. Housing prices are still falling. Yes, there's been some improvement in the ability to refinance mortgages and some improvement in actual new purchases, but the house is one of the consumer's main assets. They still are going to feel poorer.

And then finally, to the extent they have pension plans or 401(k) plans, those are also down in value. So I believe that we are not out of this crisis yet. You know, look, I hope that these green shoots turn out to be true, but I'm pretty skeptical.

And the effect of the reality that you've just given us on Ken Lewis' Bank of America is likely to be what?

I think that they will continue to experience losses in their credit card portfolio, in their retail banking positions, and in at least their legacy mortgage positions. And that's not just Bank of America; that's all financial institutions that have credit exposures to the consumer.

And so? They're a huge bank. What's going to happen?

It will take longer for the economy to recover. It will take longer for these institutions to actually be able to pay back this government money. And I think it's likely that we're going to continue to see the need for government support and government stimulus.

One of the things we've seen from the United States of America since the Obama administration came in is a calculation by them to demonize ... greedy bankers, horrible Wall Street people who took us all down in their greed and their whatever. ... What's up with that?

Well, I understand why the American public is angry. They've seen a huge destruction in value, destruction in their home price, destruction in their pension plans, 401(k)s, whatever equities they owned. And that destruction in value, someone is responsible for that.

I think it's a mistake, though, to demonize any one particular group or Wall Street. I mean, Wall Street certainly had a significant role to play in this collapse, but there's lots of other places that failed. The regulatory structure failed. The rating agencies failed. The provision of credit into housing, into financial firms, into private equity-type transactions, all of that contributed to a bubble.

And that bubble has now burst, and it's very typical after the bursting of the bubble to have recriminations about whose fault it is and who should get blamed, and also to have new regulation. And we need new regulation. You can't have entities like AIG Financial Products that can, in essence, write insurance without any oversight or any reserves. So we need change, but to demonize one particular group I don't think is constructive.

… What do you make of Geithner as secretary of Treasury? ...

... Tim is a very smart guy. He understands the issues; he understands the policies. You know, I think he's the kind of person we need in that role. I think the missteps in how this originally started to roll out -- you know, look, everybody makes mistakes. And I think he has the right skill set. He certainly has the brainpower, and he certainly has the understanding.

posted june 16, 2009

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