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John Thain was right

August 3, 2009

John Thain has been pilloried for the billions of dollars in bonuses paid to Merrill Lynch employees despite the firm’s $27.6 billion loss for 2008. He has taken the brunt of the criticism because Bank of America has said that the decision to pay $3.6 billion in Merrill bonuses before the end of the year, before the deal closed, was solely Thain’s. The former Merrill CEO has protested, telling the Wall Street Journal in April that “the suggestion Bank of America was not heavily involved in this process, and that I alone made these decisions, is simply not true.”

It turns out that true to his reputation as a straight-arrow Boy Scout, Thain was telling the truth. BofA was not forthcoming on the bonus process, according to the Securities and Exchange Commission, which says that the bank made “false and misleading statements” about bonuses in its joint proxy statement on the deal. The S.E.C.’s complaint, which BofA agreed to settle by paying a $33 million penalty, says:

On November 3,2008, in a joint proxy statement soliciting votes from the shareholders ofboth companies, Bank of America represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing ofthe merger without Bank of America’s consent. In fact, contrary to the representation in the merger agreement, Bank of America had agreed that Merrill could pay up to $5.8 billion –nearly 12% of the total consideration to be exchanged in the merger — in discretionary year-end and other bonuses to Merrill executives for 2008.

So who at BofA is responsible for hiding the truth about the Merrill bonuses? The credibility of BofA’s managment has completely evaporated as a result of the Merrill acquisition. The questions about whether the bank did adequate due diligence and whether it was bullied by regulators should have been sufficient for the board of Bank of America to oust Ken Lewis as chief executive. The regulatory embarassment over the Merrill bonuses ought to have erased any lingering doubts.

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