Come on Massey: man or mouse?

August 4, 2009

Bank of America’s settlement with the Securities and Exchange Commission sheds some light on the shambolic merger agreement the bank struck with Merrill Lynch last autumn, and how it neglected to inform its own investors of the monster bonuses it then allowed Merrill to carry off.

The word “allowed” is the mot juste here, by the way. The key schedule to the merger agreement (undisclosed by BofA but revealed by the SEC) makes it clear that BofA authorised what was in the end a payola of $3.6 billion in accelerated bonuses to Merrill bankers, 60 per cent of which was paid in cash.

That’s $2.2 billion of cash out. At BofA’s low point in Febrary, it was a fifth more than the value the deal’s terms placed on the whole of Merrill.

What’s more, what the SEC raises a lot of questions about the testimony BofA boss Ken Lewis gave to Congress on the subject in February.

“[Merrill] were a public company until the first of the year, they had a separate board, separate compensation committee and we had no authority to tell them what to do, just urged them what to do,” said the chief executive. Well yes, up to a point. But only because BofA had specifically authorised Merrill to pay out bonuses within certain defined cash limits subject only to “consultation” with it.

Yet when Thain was pushed out in January 2008, the BofA spin machine was in overdrive suggesting that Thain had not kept Lewis informed about the scale of Merrill’s losses, had blindsided him with the bonus payments and also some lavish interior work Thain did on his office. This was pretty much all bilge. BofA spokesmen may have been the ones whispering in journalists’ ears but they must have been acting with Lewis’s consent.

BofA needs to put the disastrous Merrill acquisition behind it. But it can only do this when the board has got to the bottom of the Thain dispute (and remembered to tell investors this time). If Lewis has abused his position or lied, he must go at once.

In April, BofA shareholders dismissed Lewis as chairman of BofA against the wishes of the board. He was replaced by Walter Massey, who thus found himself thrust into the awkward role of shareholders’ champion. It is awkward because Massey has been a director of BofA since 1998 and thus participated in all the contentious decisions the board took during Lewis’s tenure as CEO, especially the financially crippling acquisitions of Countrywide Financial and Merrill Lynch. But it is time for Massey to remember who appointed him – if only by default. It’s clear that Lewis wont do the decend thing, so someone needs to hold him to account and, if necessary, give him a push. Come on Massey: man or mouse?

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