In the midst of the Vietnam War, an Air Force major told war correspondent Peter Arnett that it was necessary to destroy the town of Ben Tre in order to save it. The twisted logic came to encapsulate the insanity of the entire decade-long fiasco.
We've now reached a Ben Tre moment in the financial crisis, thanks to Wall Street's fat-cat bonuses, especially those at Merrill Lynch. New York attorney general Andrew Cuomo is investigating why Merrill issued $3.6 billion in bonuses to executives last year - even though the firm lost nearly $28 billion and had to be taken over by Bank of America, with taxpayer assistance. And now the Wall Street Journal has identified some of the top recipients, including 11 executives who received more than $10 million each, in the same year that Merrill barely escaped a total flameout.
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There are reasons, of course, that these immortals deserve such riches, regardless of what's going on in the real world. Andrea Orcel, Merrill's top investment banker, ran a division that generated $550 million in revenue, by shepherding deals like the huge $101 billion purchase of Dutch bank ABN Amro by Royal Bank of Scotland and several other buyers. Orcel earned almost $34 million in Merrill stock and cash in 2008, even though the RBS deal looks like a terrible mistake in retrospect: RBS had to be bailed out by the British government, which now effectively owns the bank.
Thomas Montag, who ran Merrill's global sales and trading desk, earned about $39 million in 2008 - even though he only joined the firm in August. The big paycheck was needed to lure him away from Goldman Sachs. Another hotshot, global strategy chief Peter Kraus, earned about $29 million before leaving to run wealth management firm AllianceBernstein.
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By Wall Street standards, those numbers aren't unusual. Here's the familiar line of defense: Such high-flyers generate far more income for the firm than they earn themselves, so the pay is justified.
But to the rest of us, it's absurd that anybody should earn a multimillion paycheck when their firm is flat-lining. "RBS and ABN Amro are both bankrupt, yet the banker who put that deal together walks off with $30 million," former Federal Reserve Chairman Paul Volcker said at a recent conference in New York. "There's something the matter with that system." It's obviously worse still when a firm paying billions in bonuses turns around and leans on middle-class taxpayers for assistance.
Merrill and its moneymen are in the process of becoming Exhibit A in Everything That's Wrong With Wall Street. The firm's new parent, Bank of America, has stonewalled Cuomo and others who have tried to get more information about whether Merrill rushed the bonuses late last year, right before the federally assisted takeover by Bank of America. So far, BofA has received $45 billion in taxpayer assistance - including $20 billion in January to help account for the staggering losses at Merrill.
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Bank of America CEO Ken Lewis has insisted the bonuses went into effect before he had any say over them. John Thain, who ran Merrill before being forced out in January, has said that confidentiality obligations prevent him from naming names or offering details. News reports suggest that BofA was willing to turn over bonus details as long as Cuomo kept them confidential. He refused.
Instead, Cuomo has subpoenaed seven of the executives outed in the Journal article. They may not have done anything criminal, but as Cuomo gets more information, expect more embarrassing revelations. Those will be followed immediately by populist rants by politicans (and, ahem, the press) at Merrill's expense.
Thain has already lost his job in the bonus scandal. Lewis may lose his, as enraged shareholders weary of mismanagement call for his head. Other BofA and Merrill execs could get the axe, or just leave out of frustration. And the Merrill saga will end up as a Harvard Business School case study on how to ruin a firm.
It was never necessary to destroy Merrill in order to save it. But that's what the firm's minders seem to be doing. Or maybe, they're just trying to save themselves, all else be damned.