More Outrage Over the Merrill Bonuses

More startling revelations about the unconscionable last-minute payouts


The last time Merrill Lynch tangled with the New York attorney general, it didn’t go so well. In 2002, after a bruising battle with Eliot Spitzer over conflicts between its research and investment banking divisions, Merrill finally agreed to widespread reforms, paid a $100 million fine, and issued an embarrassing “statement of contrition.”

Apparently the honchos at Merrill think it will go better this time. After all, the public is really on their side these days, since we all sympathize with the meager $3.6 billion in bonuses Merrill’s deal-makers had to make due with this year. And that $20 billion in taxpayer funds that went to help cover Merrill’s gargantuan losses in January, after Bank of America took it over – we’d really prefer they took more of our money. Who knows, with BofA still reeling, maybe we’ll still get the chance.

 [See why the Merrill bonuses are a watershed moment.]

The Merrill bonus brouhaha is a crystallizing episode in the Great Financial Meltdown. To most Americans, it’s absurd for a company that lost nearly $28 billion in 2008, nearly collapsed, and survived thanks only to a taxpayer-subsidized rescue, to lavish million-dollar bonuses on dozens of executives. New York’s current attorney general, Andrew Cuomo, thinks so too, which is why he’s sunk his teeth deeply into Merrill and its new corporate parent. He’s investigating whether the bonuses are fraudulent, since New York law requires compensation to be in proportion to a firm’s financial success. “As Merrill teetered on the brink of insolvency, it made gigantic bonus payments,” he charges in a memorandum filed recently in New York State Supreme Court. “There is a serious question as to whether the bonuses were excessive.”

 This can only end badly for Merrill and BofA, with repercussions that could ricochet throughout Wall Street and dramatically change established practices. Cuomo wants a full list of who got bonuses. Merrill and BofA have dug in their heels, refusing to disclose the bonus recipients, even though a recent Wall Street Journal story outed some of them. A huge confrontation is building. Here’s the latest:

The bonuses were secretly planned way ahead of time. In his memorandum, Cuomo claims that the September 2008 merger agreement between Merrill and BofA included an undisclosed provision allowing Merrill to disburse up to $5.8 billion in bonuses. That shows that Merrill honchos were already scheming up ways to pay out millions at the very moment the firm was on the verge of a fatal run, just like the one that drove Lehman Brothers into a chaotic bankruptcy. And doing so with the blessing of their future Bank of America bosses.

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Merrill may have misled Congress. O November 24, 2008, lawyers representing Merrill sent a letter to Democrat Rep. Henry Waxman saying that the firm planned to make its decisions about bonuses at the end of the year, when it knew what its annual loss (or, theoretically, profit) would be. But Cuomo discovered that Merrill’s compensation committee decided almost two weeks earlier that it would take the unprecedented step of accelerating bonuses, with final numbers to be set at a follow-up meeting on December 8. Maybe Merrill didn’t technically lie to Waxman, but this is not a guy you want to split hairs with. As Chairman of the House Energy and Commerce Committee, Waxman is one of the most powerful politicians in Washington. And he’s known as a relentless investigator in his own right. Fighting a Waxman-Cuomo alliance is not what BofA wants to be doing right now – especially since the bank is basically on life support courtesy of the federal government.

Merrill set bonuses before it knew its financial results. Cuomo calls this “unprecedented.” Final bonus numbers were determined on Dec. 8. A week later, Merrill discovered that its fourth-quarter losses were likely to be $7 billion worse than it had thought when the bonuses were set. Whoops! Well, this kind of thing happens all the time in the financial industry. It’s not as if they keep track of every billion dollars. And it never occurred to Merrill that maybe the firm should rescind a bit of that bonus money – which hadn’t been piad out yet - in light of the shadier numbers.

[See why “Wall Street talent” is an oxymoron.]

Bank of America could have squashed the bonuses. BofA didn’t formally acquire Merrill until January, and the bank’s CEO, Ken Lewis, has insisted he had no control over the Merrill bonuses. Cuomo feels otherwise. “Despite its representations to the contrary, Bank of America clearly could have influenced, if not controlled, the timing of Merrill’s bonuses,” Cuomo alleges. As an example, he points out that BofA told former Merrill chief John Thain that the board of directors would “strongly disapprove” of an 8-figure bonus (reportedly $40 million) that he was seeking for himself. Following that, Thain withdrew his bonus request. So theoretically, BofA could have discouraged the broader bonus pool, too. But it didn’t.

There’s no precedent for keeping bonuses secret. Bank of America has argued that the bonus list constitutes a trade secret that could harm Merrill if it’s disclosed, by revealing competitive advantages and vulnerabilities. Cuomo has interviewed Lewis, Thain, and several other executives involved in the scandal, and failed to find any compelling evidence of that. “Neither Ken Lewis…nor John Thain … despite their combined seventy years of experience, could identify a single written policy or instance where compensation was required to remain confidential,” the memorandum says.

[See 4 myths about Obama’s bank-bailout plan.]

So here’s where this stands. Cuomo, an ambitious elected politician, has put his own reputation on the line by going after Merrill; if he backs down now, he’ll look foolish. Cuomo has also invited Waxman into the fight; expect him to oblige and hold hearings, or persuade his pal Barney Frank to do so. Even if Bank of America were able to muster a convincing legal argument that persuades a judge to keep the bonus list confidential, they’ll have one helluva time convincing the public. And the more publicity this case gets, the worse it will get for BofA – which by the way is a consumer-oriented business. Consumers don’t necessarily have to feel warm and fuzzy about their bank, but would you open an account if you felt the guys running it were a bunch of robber-barons?

Thain has already lost his job in the fiasco. Lewis is now one of the most endangered CEOs in America, thanks to shareholders fed up with dicey acquisitions and a plunging stock price. Add one other huge problem to their list of concerns.

Merrill Lynch
Bank of America
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at