For Bank of America and Merrill, Love Was Blind

IN mid-September, as Wall Street unwound and venerable financial institutions were brought to their knees, the mood inside the Manhattan law offices of Wachtell, Lipton, Rosen & Katz was decidedly celebratory.

After a weekend of whirlwind deal-making and emergency meetings at the Federal Reserve Bank of New York, John A. Thain and his team at Merrill Lynch had sold their troubled brokerage firm to the Bank of America , dodging the financial sinkhole that was swallowing Lehman Brothers.

But before Wachtell lawyers, who were representing Bank of America, signed off on the deal, they told Merrill’s lawyers that they wanted to be sure about just one more thing: the size of the bonuses that Mr. Thain and his colleagues would snare at the end of the year. A page was ripped from a notebook, and someone on Merrill’s team scribbled eight-digit figures for each of Merrill’s top five executives, including $40 million for Mr. Thain alone.

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Although Merrill had been bleeding money all year — and would continue to do so — the bonuses weren’t, as Merrill executives later explained to colleagues, about that performance. Rather, they were fees for getting the merger done, akin to what investment bankers receive for blockbuster deals. Mr. Thain in particular felt he deserved a hefty payout for his deal-making heroics, according to five individuals with detailed knowledge of the situation who requested anonymity because of their personal and business relationships with those involved.

A few weeks later, Merrill’s human resources director visited John D. Finnegan, the head of the compensation committee on Merrill’s board, and told him about the bonuses, according to four people briefed on the conversation.

“That’s ludicrous,” said Mr. Finnegan, the chief executive of the Chubb Group of Insurance Companies. He thought that the lush bonus requests came across as greedy and insensitive — particularly because Wall Street was in such dire straits that it was likely taxpayer support would be needed to survive.

An internal debate with Mr. Thain over his bonus ensued; a person familiar with Mr. Thain’s thinking said that a $40 million bonus was “never a subject of serious discussion.” Even so, others at Merrill were put off by his bonus negotiations, which helped splinter the carefully tended image of Merrill’s chief executive, a man perceived during most of his career to be a robotic and circumspect number-cruncher.

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More important, the episode revealed the rampant hubris and sense of entitlement embedded on Wall Street, foreshadowing the myriad problems that would eventually threaten the merger of the two beleaguered financial giants.

Hailed as the path forward for a Wall Street in disarray, the merger offered Merrill a chance to rebound from billions of dollars in mortgage-related mistakes and gave Bank of America access to Merrill’s well-known brand and its vast network of brokers, known as the thundering herd.

But the merger, in which Bank of America agreed to pay about $50 billion in stock for Merrill, soured at light speed. Back then, the combined companies would have been valued by the stock market at about $176 billion. Today, the combination has a market capitalization of only $39 billion.

Interviews with almost 30 current and former Bank of America and Merrill executives and employees convey just how messy the merger has been. All of them asked not to be identified because they either did not have permission from the banks to speak or because they had signed confidentiality agreements with their former employers.

On one side is Mr. Thain, who was viewed as someone who promised far more to Merrill than he delivered. Although he has repeatedly said that he helped heal the firm’s financial wounds and its battered morale, he wound up insulating himself from most top Merrill executives and failed to protect the firm from a stunning $15.3 billion loss in the fourth quarter of last year, according to several current and former senior Merrill insiders.

On the other side of the deal is Kenneth D. Lewis, a pragmatic, no-nonsense banker who, as Bank of America’s chief executive, monitored the Merrill takeover from a remote base in his Charlotte, N.C., headquarters and who, according to people at his bank, was perhaps blinded to Merrill’s risks by his own ambitions and penchant for empire building.

While Mr. Lewis has maintained in calls with analysts that his team dug deep into Merrill’s books in mid-September, analysts have repeatedly questioned whether the reviews were thorough. Although Mr. Lewis contends that he was surprised by the magnitude of Merrill’s losses, his financial team on the ground in New York had daily access to Merrill’s trading books, which would have allowed them to detect the mounting exposures.

Spokesmen for Mr. Thain and Mr. Lewis declined to comment for this article.

Now, after dismissing Mr. Thain amid public criticism about his bonus negotiations and the huge losses, Mr. Lewis faces an uphill battle as he struggles to make the marriage of two financial giants work.

CONTINUED : Outrage Over Bonuses

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