Nasty Battles Behind the Scenes at Merrill Lynch

Nasty fights are breaking out behind the scenes at Merrill Lynch and its new parent company, Bank of America (BAC). Defections are picking up speed, as top guns have quit at Merrill Lynch.

But company insiders say the reasons for the fights and the defections go beyond the obvious problems of office power plays, and of melding a freewheeling, backslapping brokerage culture with a staid, gun-metal grey retail bank environment.

And company insiders say they go beyond the fact that Merrill executives are now bristling at BofA's potential pay cuts, and tighter bank controls on their brokerage operations.

Merrill Lynch executives say they are furious that Merrill chief executive John Thain is not doing enough to stick up for his own team, his Merrill executives.

Specifically, they say Thain has fought more to win lavish compensation for his Goldman Sachs (GS) cronies he hired to work at Merrill than for the Merrill team. "That's blatantly false," says Jessica Oppenheim, Merrill spokesman, without further comment or explanation.

The weekend that Lehman Bros. collapsed, Merrill's Thain, who took over a year ago after Merrill's former head E. Stanley O'Neal was ousted, moved swiftly to sell the world's biggest brokerage to Bank of America, the biggest U.S. bank by assets. Merrill's stock was in a freefall, after reporting $55 bn in losses and writedowns stemming from bad bets made in the credit crisis.

The merger is now under way, and the combined company is working through which top managers to keep and which to fire. The company plans to cut as many as 35,000 jobs. Merrill Lynch has received $10 bn in TARP money from the U.S. government. Bank of America has received $15 bn. Thain is now the president of global banking, securities and wealth management at the merged company.

Bank of America's Ken Lewis, a formidable empire builder in American banking, has said that the reason he bought Merrill Lynch was to get under his tent the coveted 16,000 brokers who make up the Thundering Herd.

As he has built the country's biggest deposit base in the country, the thinking is Lewis can cross sell Merrill's brokerage offerings to plain-vanilla bank corporate and retail customers, thereby tapping Merrill's rich vein of underwriting and advisory fees.

But insiders say Lewis may have a hard time reaching that goal. The defections, which go beyond high-level executives, are hitting hard now, as BofA is looking to ramp up a profit stream from Merrill's brokerage, a brokerage that is now seeing its top profit machines and rainmakers walking out the door on a daily basis.   

High-level Defections

Major players have left Merrill Lynch, with insiders saying many are leaving in disgust. Robert McCann, who ran Merrill's brokerage operation, and Greg Fleming, head of investment banking who brokered the Merrill-BofA merger, have quit the firm.

Other senior Merrill executives departing include the widely respected vice chairman and general counsel, Rosemary Berkery; vice chairman Jeff Edwards; and Merrill's co-head of European markets, Brent Clapacs. McCann, Fleming, Berkery, Edwards and Clapacs did not return calls for comment. John Thain did not return repeated calls for comment.

Thain is the former chief financial officer at Goldman Sachs and former CEO of the New York Stock Exchange, where he oversaw the merger of the Big Board with the Paris-based exchange Euronext.

Thain's Goldman Favoritism

A number of execs point to the fact that Thain did nothing to fight for their bonuses--even though he made sure his former Goldman Sachs colleagues got their sizable pay.

For example, insiders say Thain worked hard to woo Goldman Sachs colleagues like Thomas Montag and Peter Kraus with tens of millions of dollars in rich pay and bonuses, at a time when Merrill was suffering from massive writedowns and losses never before seen in the history of the firm, at a time when the company was poised to get taxpayer funded bailouts, at a time when the company was laying off by the score veteran employees who had built Merrill Lynch, at a time when the company was even yanking Bloomberg terminals from desks.

It's estimated Montag received an initial $39.4 mn in compensation with another additional $50 mn in payouts to cover compensation he forfeited at Goldman Sachs. Kraus recently quit Merrill, receiving an estimated $25 mn in pay from the company, which he joined only last May after leaving Goldman Sachs.

Thain, who signed on for anywhere from an estimated $50 mn to $120 mn in pay, fought with the board to keep his own $10 mn bonus, eventually deciding to forfeit it.

An executive says: "A great board leader would have said, ‘don't pay me, but pay my team.'"

For example, McCann, Fleming, and Berkery did not get their bonuses for the last two fiscal years, receiving only their base salary of about $350,000.

"Thain only worked here for one year," Merrill's Oppenheim says, without commenting on what Thain arranged in terms of executive compensation and bonus payouts for Merrill Lynch officials in the current fiscal year.

Oppenheim adds that "Montag came here from another firm in the middle of the year and when you leave a firm to go to a competitor, you have to forfeit your pay from the previous company. So it's general practice" for a hiring company to make that executive whole, adding, "that would happen to anyone who came to Merrill Lynch from a competitor."

However, executives say that explanation falls far short of the true story of what's really going on at Merrill Lynch when it comes to Thain's Goldman cronyism.

Executives say Merrill workers are at a disadvantage, as they didn't work with Thain "for 20 years at Goldman Sachs" and "don't have a 20-year relationship with him," as one executive puts it. Another notes: "Like Thomas Montag and Peter Kraus did," adding Thain is "displaying favoritism toward people at Goldman Sachs."

Morgan Barney Threat

Meanwhile, Merrill and BofA face a significant threat from Citigroup's sale of a majority stake in its Smith Barney brokerage to Morgan Stanley, a deal which could be reached by the end of today.

The deal could create a dominant brokerage that could outnumber Merrill and BofA in both number of brokers and assets under management. Talk at both Merrill Lynch and Morgan Stanley is that McCann could be wooed away to work with James Gorman, a widely respected executive and marketing mastermind, who will chair the Smith Barney-Morgan Stanley brokerage joint venture.

The Rank and File Speak

Meanwhile, a number of executives at Merrill Lynch feel that Lewis and Thain have not delivered the message to them about what exactly they expect from them in the new, merged company.

As one executive explains it: "The problem is the cultures are so very different, and in Ken Lewis and John Thain you have two people who are not strong leaders in terms of an interpersonal standpoint, they are smart, hard working, and strategically savvy," adding, "they have integrity, but neither one of them have much in the way of personality, they don't relate to people on a day-to-day basis, where the average person can hear their message, internalize it, trust it and say ‘I want to get behind them.'"

Meanwhile, Bank of America is digesting both Merrill and Countrywide Financial, one of the country's biggest sellers of shoddy subprime and Alt-A mortgages. Countrywide "pointed its conveyor belt at Merrill, and we packaged those loans into securities that eventually blew up," says one executive.

Citigroup analyst Keith Horowitz wrote in a recent report that he estimates that Bank of America and Merrill had $56 bn in potentially bad assets as of Sept. 30, figuring it may to write down $5.1 bn for the fourth quarter. BofA has already booked an estimated $14.3 bn in writedowns for Countrywide's loans, with billions of dollars more in writedowns expected to be on the way.