NEW YORK (Reuters) - John Thain, former chief executive of Merrill Lynch & Co, has been ousted from Bank of America Corp after the bank discovered surprise losses at the brokerage it bought three weeks ago.
Bank of America Chief Executive Kenneth Lewis expressed dismay last week about the scope of losses from mortgages and toxic debt on Merrill’s books. Investors and analysts had said the losses made Thain’s position as head of global banking, securities and wealth management tenuous.
“Ken Lewis flew to New York today, met with John Thain, and it was mutually agreed that his situation was not working out, and he would resign,” Bank of America spokesman Robert Stickler said.
The departure of Thain, 53, is effective immediately.
Thain could not be reached for comment, and Merrill was unavailable for comment. Bank of America said the terms of Thain’s departure would be disclosed later.
His exit was announced a day after he acquired 84,600 Bank of America shares worth about $483,320, boosting his direct stake to 549,671 shares. The purchase was disclosed in a U.S. Securities and Exchange Commission filing.
Bank of America shares closed down 14.5 percent.
Brian Moynihan, 49, the bank’s general counsel and a former investment banking chief, will replace Thain. Global markets chief Tom Montag, 52, will report directly to Lewis and help set the bank’s strategy.
Thain and Lewis cobbled together the merger after less than 48 hours of negotiations in mid-September, the same weekend Lehman Brothers Holdings Inc slid into bankruptcy.
But Lewis threatened to back out of the deal following shareholder votes at both companies last month after it became evident Merrill’s finances were much worse than expected.
Lewis said U.S. regulators pressed him to complete the deal. Last week, the government agreed to inject $20 billion in capital, and to share in losses on $118 billion of debt.
Bank of America said Merrill lost $15.31 billion in the fourth quarter, separate from Bank of America’s own $1.79 billion quarterly loss -- its first in 17 years. The bank also slashed its dividend to a penny per share.
“This is a huge crisis of credibility,” said David Dietze, chief investment officer at Point View Financial Services in Summit, New Jersey. “Someone has to fall on a sword.”
Complicating the matter was that Merrill announced bonuses in late December, earlier than usual and just before the $19.4 billion merger closed on January 1.
New York Attorney General Andrew Cuomo is investigating the possibility that Merrill awarded “large, secret, last minute” bonuses, a person familiar with the matter said Thursday. Cuomo’s office declined to comment.
Also, CNBC reported Thain hired well-known Los Angeles interior designer Michael Smith to redecorate his Merrill office a year ago and ran up a $1.22 million bill, including for a $35,115 “commode on legs” and a $1,405 parchment waste can.
Smith’s designing company could not be immediately reached for comment. Bank of America did not confirm the report.
Other top Merrill executives to recently leave include Robert McCann, who was to lead the combined brokerage, and investment banking chief Greg Fleming. Just a week ago, Lewis told investors he was happy that Thain was staying on.
Lewis has spent some $130 billion on major mergers to build Bank of America, but has raised the hackles of investors who thought he rushed too quickly to buy Merrill.
Bank of America has said it expects to cut as many as 35,000 jobs to help save $7 billion a year, but expects the acquisition to reduce earnings per share over two years.
Pessimistic analysts have speculated the government may eventually need to nationalize one or more large banks if the global recession and credit crisis get worse.
While Bank of America stock looks cheap by traditional measures, “the investment is still fraught with risk because of the potential for nationalization or the need for dilutive capital raising,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago.
The stock dropped 97 cents to $5.71 on the New York Stock Exchange and has fallen 87.3 percent from a 52-week high last Feb 1.
The report of Thain’s office redecorating came on the heels of $12.2 billion in net losses at Merrill in the second half of 2007, as writedowns on mortgages and other toxic debt began to mount. Thain became Merrill CEO in December 2007.
The reported outlays recalled heavy spending on personal items by executives at other companies, including a $6,000 shower curtain owned by former Tyco International Ltd chief Dennis Kozlowski, now in prison for fraud.
U.S. Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said the office decorations would reflect “bad judgment” on Thain’s part.
“I know John Thain and like him, but that was terrible precedent he set and a terrible decision,” Shelby told reporters. “I wouldn’t want my money spent that way.”
Thain was considered a candidate to become U.S. Treasury Secretary if U.S. Sen. John McCain had defeated Barack Obama in the race for the White House.
By joining Bank of America, Thain became a top candidate to succeed Lewis, 61, but analysts have said he would not want to remain in a subordinate role for long. Before running Merrill, Thain was CEO of NYSE Euronext.
Earlier in his career, Thain was chief operating officer at Goldman Sachs Group Inc, which also employed Montag for 22 years.
While Thain received credit for possibly saving Merrill from collapse, Lewis has faced growing criticism from investors and analysts who accused him of overpaying for Merrill, and not renegotiating the merger terms once Merrill’s losses became evident. The bank has also been hit with shareholder lawsuits.
“There are no winners in this situation,” said Michael Holland, founder of money manager Holland & Co.
In buying Merrill, Bank of America extended its reach throughout the financial system. Citigroup Inc tried such a “financial supermarket” approach, but is now abandoning it.
“If they can make it through this, two to three years from now we’ll see an IPO of Merrill,” said William Smith, CEO of Smith Asset Management in New York. “We’ll go back to how it used to be. Banks are banks, brokers are brokers, and investment banks are investment banks.”
Reporting by Elinor Comlay, Joan Gralla, Juan Lagorio, Deepa Seetharaman, Jonathan Stempel, Phil Wahba, Dan Wilchins and Lilla Zuill in New York and Susan Heavey in Washington, D.C.; editing by John Wallace and Jeffrey Benkoe