Nearly 700 at Merrill in Million-Dollar Club

For nearly 700 lucky Merrill Lynch employees, 2008 was a million-dollar year, even though the brokerage firm lost $27 billion.

On a day the chief executives of eight large banks were questioned about their industry’s excesses on Capitol Hill, Andrew M. Cuomo, the attorney general of New York State, raised hackles by disclosing how Merrill Lynch distributed its 2008 bonus pool. The payments, made just before Merrill Lynch was sold to Bank of America in December, have already stirred anger for being paid earlier than usual. And Mr. Cuomo made it clear that the bulk of the bonuses were paid to a small portion of Merrill Lynch’s 39,000 employees.

“Merrill chose to make millionaires out of a select group of 700 employees,” Mr. Cuomo wrote in the letter, which was sent to the House Financial Services Committee on Tuesday night.

The disclosure again puts Wall Street’s compensation system, which has long rewarded select individuals with handsome bonuses, under the microscope.

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Many of the questions at Wednesday’s hearing in Washington centered on whether banking chiefs would take bonuses, and Mr. Cuomo has homed in on the payments made to executives by banks that have received more than $350 billion from the federal government. That banks have collectively lost hundreds of billions of dollars has only fueled public scorn. (Click here for coverage of the hearing)

The Merrill Lynch payments were not alone in the glare. Plans to pay brokers at the new joint venture between Morgan Stanley and the Smith Barney unit of Citigroup have endured a closer look in recent days, especially after a senior Morgan Stanley executive admonished his employees to call the payments “retention awards,” not bonuses.

Mr. Cuomo and others have criticized Merrill for moving up the bonus payments to December, just before shareholders approved the merger, instead of the usual time in January. John A. Thain, who as Merrill’s chief executive helped orchestrate the firm’s sale to Bank of America , was ousted from the combined company last month, largely over the bonus controversy.

For its part, Bank of America has acknowledged that it was fully aware of the amounts and timing. In fact, the bank persuaded Merrill Lynch to reduce the size of the bonuses. But in a statement Wednesday, the bank said: “Although we had a right of consultation, it was their ultimate decision to make.” However, several people involved say the bank signed off on the bonuses.

As part of his investigation into the matter, Mr. Cuomo has subpoenaed several executives from both Merrill and Bank of America, including Mr. Thain and J. Steele Alphin, Bank of America’s chief administrative officer. Kenneth D. Lewis, Bank of America’s chief executive, is likely to receive a subpoena as well.

If that $3.6 billion had been evenly disbursed among Merrill’s work force each person would have received about $91,000. Instead, the top four bonus recipients received a total of $121 million, Mr. Cuomo wrote.

One of them was Thomas K. Montag, who now runs global markets at Bank of America, according to a person with knowledge of the matter. Mr. Montag was given a contract worth $39 million when he moved to Merrill from Goldman Sachs last year.

Another was Peter S. Kraus, a former Merrill executive vice president and now the chief executive of AllianceBernstein. The other two were part of Merrill’s upper management, this person said.

Other top Merrill executives, including Mr. Thain; Gregory J. Fleming, its former president; and Robert D. McCann, its former wealth management chief, did not receive bonuses.

Mr. Cuomo also wrote that 20 people were paid more than $8 million and 53 people were paid more than $5 million. Some of the bonuses — 30 percent — were paid in stock, according to people with knowledge of the matter.

It is not clear whether Mr. Cuomo will seek to claw back those bonuses. Proving that the payments violated New York’s so-called fraudulent conveyance law, which enables creditors to sue to recover unjustified compensation in certain cases, would be difficult because of high legal hurdles. Mr. Cuomo may try to show that Merrill and Bank of America failed to disclose material information about Merrill’s financial health to allow the payments to be made.

Separately, the issue of retention payments to brokers of the soon-to-be-combined Morgan Stanley and Smith Barney took on more attention on Wednesday, after the Huffington Post Web site posted audio of a conference call held by James P. Gorman, a Morgan Stanley co-president.

On the call, Mr. Gorman emphasized that the payments were not bonuses, but were a normal award to keep highly prized financial advisers after mergers of brokerage firms. The awards would also be based on the 2008 performances of brokers, not 2009’s performance.

Bank of America had also granted generous payments to Merrill’s top producing brokers.

James Wiggins, a Morgan Stanley spokesman, said that such payments were necessary and would come out of operating revenue, not government bailout funds. Morgan Stanley has received $10 billion, while Citigroup has received $50 billion.

“We are getting very heavily, aggressively recruited against,” he said. “It is important that we retain as many of our successful financial advisers as we can.”

Morgan Stanley was contacted by Mr. Cuomo’s office last week to discuss the potential retention payments, a person with knowledge of the matter said.

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This story originally appeared in The New York Times