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Maybe John Thain Wasn't the (Most) Bad Guy After All

Does John Thain -- the former head of Merrill Lynch who is now one of the richest, most reviled unemployed people in the country -- deserve our pity?  And is Bank of America CEO Ken Lewis blatantly lying to shareholders? Let's review the case:

The common news story goes like this: Thain was brought in 14 months earlier from the NYSE to rescue Merrill Lynch from its bleeding balance sheet. But in the late summer of 2008, it became increasingly clear that the company didn't have the financial security to stand on its own legs, and Bank of America agreed to buy it up. In January, it was revealed that Merrill had paid out billions of dollars in bonuses and managed to produce another $15 billion loss for the quarter. The news drove BofA CEO Ken Lewis up the wall, and he forced Thain to resign.

As Thain told the WSJ, Lewis' reaction to the Merrill bonuses is phony, because he had known about them for quite a while. I'm not really interested in the he-said/he-said of Merrill's bonuses. I'm more interested in Lewis' reaction to Merrill's quarterly losses.

Two things make Lewis' shock and rage at Merrill's losses smell fishy: what we knew then and what we know now. What we knew then was that BofA had recently conducted its own due diligence stress test of Merrill's assets, and it doesn't speak very highly of the company's risk managers that they somehow miscalcuated Merrill's eventual writedown by a matter of billions that was so unacceptible, it positively demanded the head of the company to resign.

What we know now is that Lewis was aware of some kind of enormous impending losses from Merrill's balance sheet. That's why he expressed serious reservations to the Feds last summer about taking on its risk, and it's also why the feds -- then Treasury Sec. Hank Paulson and Fed Chair Ben Bernanke in particular -- opened Lewis' mouth, held his nose, and forced him to swallow the bitter swill of Merrill's assets in September.

So here's the time line. BofA shareholders voted to approve the merger with Merrill on December 5. Bank of America reported Merrill's loss of $15.84 billion in the fourth quarter on January 16. But Lewis had known that Merrill's asset sheet was poisonous four months earlier in September, when Paulson and Bernanke forced it through, but he "wasn't supposed to talk about it," or something, according to Lewis' testimony. Does that sequence seems extremely fishy to anybody else?

In this light, it's hard to see Lewis' rage and Thain's resignation as anything more than an act to fool shareholders into viewing Lewis as an innocent lamb caught in John Thain's web of expensive lies. The simplest retelling of the story would go like this: Lewis was on the fence about acquiring Merrill because he wanted to expand BofA but he was also extremely nervous about Merrill's balance sheet. The Feds sweetened the deal and talked him off the fence, and Lewis -- who knew about the crap sandwich of assets waiting to emerge in January -- had the board vote on the merger in December. When Merrill's loss emerged even worse than all sides expected, Lewis rushed to save face by forcing out Thain. This retelling might be completely wrong. Either way, shareholders should be very curious.