When the new CEO, John Thain, arrived at the engineered the company's sale ro Bank of America. beleaguered investment bank Merrill Lyach in The acquisition was set to close in early 2009 ; November 2007, he was vicwed as a potential Thain received overwhelmingly positive press. saviot. Merrill Lynch had been staggering under Under the acquisition agrecment, Thain would enormous losses related to Americal's mortgage continue working at Bank of America, reporting crisis. The company had a large portfolio of directly to CEO Ken Lewis. It was at this point CDOs, or complex financial derivatives created to that things started ro go very wrong for him. insure bonds backed by home mortgages against. First, it was revealed that when he was cutting the possibility of default. The former CEO, Stan jobs and preaching the virtues of cost controls, O'Neal, had taken Merrill Lynch into the CDOs Thain was at the same time personally authorizbusiness when trading these instruments was very ing $1.2 million to redecorate his office at Merrill profitable. Bot as real estate prices collapsed in Lynch. He spent 5800,000 to hire a well-known America and mortgage defaules soared, the value designer, $87,000 on an area rugh four pairs of of these CDOs could not be accurately deter- cartains for $28,000, a pair of gucst chairs for mined, they could not be resold, and companies $87,000, and more. If this wasn't bad enough. like Metrill Lynch had to write biltions off their it was soon discovered that he had accelerated balance sheets. Stan O 'Neal was fired from Mer. 2008 bonus payments at Merrill Lynch by several rill Lynch by the board of directors and replaced weeks, thercby allowing executives to collect bonuses before the acquisition by Bank of American Thain was recruited from the New York Stock closed. Many wondered why Merrill Lynch was Exchange, which he had lead since 2004. At the granting any bonuses, when the firm was bookNYSE. Thain followed hot on the hecls of Richard ing large losses, the stock had lost over 80% of its Grasso, who had becn dismissed from the NYSE is value, and the government was lending $10 billion a scandal over excessive executive compensation to the troubled company. Compensation and ben(in 1 year Grass had received over $130 million efits at Merrill Lynch totaled $15 billion in 2008. in pay). Under Thain's, Ieadership, the NYSE pros- inclading 52 billion in honuses! The total compered, its stock price rose 600% between 2004 pensation was down just 6% from the prior year. and 2007, and Thain's reporation followed. How, wome asked, could this possibly be justified At Merrill Lynch, Thain found himself con- given the enormons destruction of stockholder fronted by enormous chatkenges. He was able to weathh at Merrill Lynch? Moreover, newspapers raise additional capital for Merrill, helping to stave were reporting that Thain had personally lobbied off bankruptcy. He also cut costs, laying off thou* the board of directors' compencion committee sands of employecs, and exiting several businesses. at the company for a multimiltion Jollar bonus To the employees that remained, he preached the for 2008 , arguing that he had eifectively saved virtues of tight cost control, telling them that mis- the company by engineering a sale and should be cellaneos personal expenses had to be reduced to rewarded for it. When this information became a minimum. Ulimately, however, Thain recognized public, an embarrassed Thain quickly changed his that Merrill Lynch could not survive as an inde- position and stated that he would take no bonus pendent entity. Although the Federal Goverament for the year 2008. had already consmitted $10 billion in additional Things came to a head in December 2008 , capital to the company as part of its financial res- when. Thain revealed to Ken Lewis that Merrill's cues package for the banking sector, Merrill Lynch losses in the fourth quarier would be much still needed more. In the fall of 2008 , and Thain larger than previously thought, totaling nearly $15.3 billion. Lewis, who was reportedly furious in capital to belp it with Merrill Lynch's losses. at being mislead, almost scuttled the buy out, but Three weeks after the deal closed, however, Bank was pressured to proceed by the Federal Govern- of America announced that Thain would leave the ment, which had already loaned money to Bank of company. Effectively, he had been fired. 14 America, and now committed another $20 billion Caso Discussion Quostions 1. If you put the issues related to bonuses and per- 4. What might John Thain have done differently? If he sonal perks to one side, how would you judge the effectiveness of John Thain as the lesder of an orgahad pursued a different set of actions with regard nization deep in crisis? to personal perks and bonuses, what might the 2. Where the actions that John Thain took on personal outcome have been for him and for Merrill Lynch? perks and bonuses legal? Were they ethical? What S. At the middle of the deepest crisis since the great does this case teach you about the difference be- depression. Losses were increasing in financial tween staying within the bounds of the law and institutions by the hour as the value of their behaving ethically? holdings of mortgage-backed securities plum- 3. Why do you think John Thain pushed for such high meted. Given this situation, shouldn't Ken Lewis bonuses in 2008 given that Merrill was in a deep have expected higher losses at Merrill Lynch? financial crisis? What might his motivations have Was Thain really misleading him? Why might he been? have been mislead