Show Me the Money

New York State Attorney General Andrew Cuomo wants former Merrill Lynch chief executive John Thain to tell him the names of who exactly got the $3.6 bn in bonuses at a time when Merrill was in trouble.

Guess who got the money?

The controversy reignites embarrassing headlines about Thain's management practices-and his alleged favoritism toward certain workers.

Thain was ousted by Bank of America, which acquired Merrill, last month after the brokerage was acquired by BofA with the help of taxpayer money. Thain's ouster came after he had the brokerage accelerate the payment of the $3.6 bn in bonuses into December, a month earlier than when they are usually paid in January.

Bank of America had demanded $20 bn more in taxpayer money-on top of the $15 bn TARP money it had already received-to pay for the $29.1 bn price tag to buy Merrill Lynch, a deal that closed Jan 1, after BofA threatened to walk away from the deal. Merrill Lynch had earlier received $10 bn in TARP money from the U.S. government.  

Bank of America reported a record $2.39 bn in fourth quarter losses-and $15.3 bn in fourth quarter losses for Merrill, a sum that has since been raised to $15.8 bn due to mistakes made in valuing derivatives.  

Merrill revised its full-year loss to $27.61 bn from the $27.08 bn it reported last month, according to a filing with the Securities and Exchange Commission.

Goldman Cronies

Four top executives split $121 mn, ranging from $18 mn to $39 mn, Cuomo says. The New York attorney general also says that Merrill made millionaires out of 696 executives--the top 149 executives who received bonuses got a combined $858 mn, says Cuomo.

You can expect to see the following names come up as this story unfolds.

Thain got a $15 mn bonus when he was hired in December 2007 to replace E. Stanley O'Neal, Merrill's former CEO who was ousted amid massive losses. He stood to get $11 mn more in accelerated stock payouts if Merrill was acquired.

Thain lured a Goldman friend over, trading pro Thomas Montag, with a $76 mn package including a $39.4 mn stock and cash bonus as well as accelerated stock awards. Montag, who joined in August 2008, was named as Merrill's global head of sales and trading operations. Thain also gave Goldman's former head of strategy, Peter Krause, an estimated $95 mn including a $29.4 mn bonus when he started working at the brokerage in September. Krause quit in December, his $29.4 mn bonus guaranteed for three months of work, or about $294,000 a day.

Krause and Montag's bonuses were guaranteed--raising questions as to why Merrill's Thain gave out such gaurantees when the brokerage was on the brink of collapse.

Merrill spokesmen argues that Thain had to dish out this money to replace the Goldman packages they had to forfeit, people familiar with the matter said. That meant Merrill also had to buy out what was left of Montag's equity in Goldman, which boosted his entire compensation bundle to more than $50 mn.

Montag's compensation package is about five times as much as Thain was paid in 2006, when he headed NYSE Euronext and pulled in $9.36 mn for the year, the Wall Street Journal estimates.

And Montag is getting triple former Merrill CEO David Komansky's $16.3 mn pay package in 2002, his last year as Merrill Lynch's CEO, the Journal adds. Montag's pay is about one-and-a-half times more than Komansky's pay of $32.6 mn during the boom year of 1999, the paper says.

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."

How it Stacks Up

By comparison, Goldman CEO Lloyd Blankfein was awarded about $53.97 mn in its 2007 fiscal year, including a $26.99 mn bonus, Reuters reports. Morgan Stanley CEO John Mack received about $1.6 mn in salary and other compensation for fiscal 2007 and Lehman Brothers Holdings CEO Dick Fuld got $22 mn.

Meanwhile, the top eight executives at Bank of America took no bonus compensation for 2008, and the next tier saw their bonuses slashed by 80%.

Cuomo Investigates

According to The Wall Street Journal, Cuomo's office is also seeking information on whether investors were misled about the depth of Merrill's losses in late 2008. The office also is trying to determine whether details of the bonuses to Merrill employees should have been disclosed to investors.

Will executive names be cited? Cuomo's office says the five individuals Thain said he was only permitted to discuss were among the few executives that didn't get a bonus, "thus being a meaningless gesture," reports indicate.

Merrill Lynch Executives Iced Out?

Merrill Lynch executives say they are furious that Thain did not do 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," a Merrill spokesman has said, without further comment or explanation.

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 initial calls for comment. Thain did not return repeated calls for comment.

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.

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, who signed on for anywhere from an estimated $50 mn to $120 mn in pay, fought with the board in December 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.'"

All this 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 35,000 workers, inlcuding veteran employees who had built Merrill Lynch, at a time when the company was even yanking Bloomberg terminals from desks.

A Merrill spokesman has said 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.