"In 2009, if you are a bank chief executive, your reputation will be lower than a serial killer’s." A senior trader told me this late last year and I winced. "Serial killer," I stuttered. "Surely not?" I now see that senior trader was correct.
The vitriol that ordinary people feel towards senior bankers is palpable. "They are all idiots and what’s worse is they’re taking us down with them," an architect in Florida hissed. And where’s the upside? It’s going to be a long hard grind from here: "bank bosses" and "bonuses" are three words that will not sit happily together in the same sentence for many years.
In my December column, I discussed the takeover of Merrill Lynch by Bank of America. "Might Ken be tempted to renegotiate or pull back given the terrible market conditions?" I asked. I concluded that Treasury secretary Hank Paulson would not allow Ken Lewis to wobble. "Can you imagine the lambasting Ken would receive from Hank if he were tempted to demur?" I wrote.
I’m not sure whether I am a witch, a prophet, or merely a lucky commentator, but we now know that as my article was published, Lewis was flying to Washington to plead with Ben Bernanke and Hank Paulson to allow Bank of America to walk away from the deal. Ken Lewis is tough. Grown men are frightened of him. So why, at that fateful meeting in Washington, did he back down? A mole murmurs: "I guess Paulson asked him: ‘Do you want to be the man who single-handedly brings down the global financial system?’" And Ken caved in. Lewis is not an urbane, Ivy League investment banker. Maybe he fell under the spell of slick Hank the Spank. Or maybe he felt he could make the Merrill deal work in the long run.
Lawsuits loom: they will focus on when did Ken know what? On December 5, shareholder meetings of both firms approved the takeover. Nothing was disclosed about large fourth-quarter losses. Yet by December 17 Lewis had enough ammunition to fly to Washington to talk to the two most senior individuals in the US financial world about his doubts. If Lewis took the time to fly up to Washington, he must have had very serious doubts. After all, what are conference calls for except to thrash out and flesh out details of deals? No, Ken was a worried man. Yet two weeks later he closed the Merrill acquisition.
January was chilly for Lewis. Early in the month, two of the most senior Merrill executives resigned: Greg Fleming, president and former head of investment banking; and Robert McCann, the head of retail brokerage. Brokerage and investment banking were vital franchises for Merrill and a large part of the reason why Ken wanted the firm.
I doubt Ken was prepared for the value destruction in mid-January when Bank of America’s 2008 results were released and it was announced that Merrill had taken a $15.3 billion net loss in the fourth quarter alone and a net loss for 2008 of $27 billion. Bank of America shareholders are incandescent with rage. One disgruntled investor allegedly accused Lewis of thinking with a body part other than his brain when he decided to purchase Merrill.
As the terrible fourth-quarter results were unveiled, Bank of America started briefing against John Thain, Merrill Lynch’s chief executive. This is always a high-risk press strategy. A public relations specialist comments: "Washing dirty laundry in public is dangerous. Now even grannies in Topeka, Kansas, know that Bank of America is in chaos." The Financial Times reported on January 16 that when Lewis heard that Thain wanted to take a $10 million bonus, Lewis was "purple-faced with rage". On January 20, the Wall Street Journal reported a "person familiar with Bank of America" claiming that: "Mr Thain didn’t appear to be fully engaged in issues surrounding the deal just when the scope of Merrill’s losses was becoming apparent." Someone leaked to CNBC that Thain had spent $1.2 million of Merrill Lynch’s money refurbishing his office and paid his chauffeur $230,000 for a year’s work. "$230,000 to drive a car?" a commentator asked incredulously.
The revelation about the office refurbishment will always haunt Thain, who might in future be dubbed "Toilet Thain" (but then the US slang is John anyway) because of the $35,000 purchase of a "commode on legs". In 18th-century France, a commode was the word for a cabinet. Later the Victorians used the word to describe a bedside table in which a chamber pot could be stored and today the word is associated with a portable toilet. President Barack Obama became embroiled in the controversy and confusion and expressed his disgust at "the reports that we’ve seen over the last couple of days about companies that have received taxpayer assistance, then going out and renovating bathrooms or offices or in other ways not managing those dollars appropriately".
Ken's exit interview with John
A vignette dances before my eyes: Lewis storms up to Thain’s office suite on the 32nd floor of Merrill’s World Financial Center headquarters in New York. Ken is breathing heavily: waves of anger mean that he is virtually hyperventilating. A suave Thain pads to the door in hand-embroidered, velvet Gucci slippers. His wife, Carmen, has instructed him not to wear shoes in case he damages the delicate fabric of the expensive carpet. Thain winces at Lewis’s sturdy brogues and considers asking Ken to don a pair of blue plastic overshoes that are carefully concealed in an Hermès carrier bag by the door. Taking in his boss’s steely blue eyes and tightly pursed lips, Thain quickly dispenses with the overshoe strategy.
"Please sit down," Thain proffers, waving to the Regency chairs (cost: $24,286) and the pair of guest chairs (cost: $87,783). Lewis is too cross to sit down and perches, in an ungainly fashion, on the 19th-century credenza (cost: $68,178). A creaking sound can be heard as one leg crumples. Ken and the credenza collapse. As he falls to the floor, Lewis gasps: "You’re fired". Fortunately, the plush rugs (cost: $131,674) prevent him from sustaining a permanent injury. Without another word, Lewis hobbles off, exits the building and returns to Charlotte, North Carolina, by his preferred method of transportation – private jet. Can it be true, by the way, as a mole murmurs, that Bank of America still owns nine private jets? A Bank of America spokesperson had no comment on the jets. But is such luxury appropriate for an institution that has gobbled up billions of dollars of taxpayers’ funds?