Bank of America's Bizarre Defense of Merrill's Bonuses

Bank of America is defending its $33 million settlement with the SEC against charges that it lied to shareholders about bonuses paid out by Merrill Lynch after BofA bought the bank for $50 billion. I find BofA's position in the SEC case fascinating and somewhat bizarre.

On the one hand, you have BofA CEO Ken Lewis' first draft of history. In January Lewis fired Merrill Chief John Thain over mounting losses and controversial bonuses paid out by Merrill as it was collapsing. BofA claimed it had no control over the bonuses, and the company appeared to be appalled by Thain's decision to pay out billions of bonus money. This BusinessWeek lede was typical of the sentiment:

John Thain is out at Bank of America. The last straw for the former Merrill Lynch chief executive officer was the news that a number of top executives at the once mighty brokerage got paid hefty bonuses on the eve of the firm's Jan. 1 merger with BofA.

But now that the SEC is suing Bank of America for concealing Merrill's bonuses, BofA explains in a brief: "It Was Widely Understood From Merrill Lynch's Public Disclosures that Merrill Lynch Intended to Pay Multi-Billions of Dollars in Year-End Incentive Compensation" dating back to October 2008 -- three months before Thain's resignation. Thain was fired in January for paying bonuses that were widely known since October? Strange.

But no stranger than Lewis' testimony this summer that he tried to back out of the Merrill merger in December. Consider the timeline of events (see right). On Dec. 3, BofA revised Merrill's loses by $2 billion. It considered this update "not material" using perhaps the most liberal interpretation of the word material I've heard. On Dec. 5, BofA shareholders, ignorant of this new internal forecast, approved the deal. Two weeks later, Merrill's quarterly loss increased by another $2-3 billion. More than "material," this revelation inspired Lewis to try to void the deal entirely!

The judge who voided the BofA $33 million payment is entirely correct. There's enough deceit and half-truths in this Bank of Amerrill saga to fill a raft of Mamet plays. The true story is, not merely material, but also worth considerably more than a sneaky $33 million payment.