Former Merrill Lynch chief John Thain, the architect of the firm’s sale last year to Ken Lewis’ Bank of America, was lauded for selling the company at a time when the business model for Wall Street investment banks was crumbling amid a funding and liquidity crisis. Having gone on record favoring government intervention in the financial markets (TARP) to prevent a classic bank run that could bring down the nation’s entire financial system, I’m compelled to note that significant abuses of this federal intervention have recently come to light.
Bank of America shareholders are now furious that their company bought Merrill Lynch because after the transaction closed certain problems began to surface. Among these problems was the untimely (read: late, not disclosed, not accurately described) news that Merrill Lynch owned a lot of worthless securities for which Bank of America overpaid. In another day and age, Bank of America would be penalized for making such a stupid decision (buyer beware is the rule of the land in mergers and acquisitions) beginning with a serious drop in shareholder value, which in fact happened during the past weeks. But in the age of TARP, Bank of America had another alternative to what otherwise might have been a fatal mistake: ask the Fed for additional funding to cover the capital deficiency that resulted from a bad acquisition.
Understandably, Bank of America stockholders are incensed and they are suing. However, as in any monumental FUBAR, the really annoying aspects are to be found in the details. During the period of time between when the Merrill Lynch sale to Bank of America was announced (on the very day of the Lehman Brothers bankruptcy) and yesterday, when Bank Of America’s chief Lewis fired Merrill’s John Thain, a mind boggling list of excesses and greed have been made known:
1) Merrill Lynch expedited bonus payments (otherwise known today as the great bonus heist, exceeding one billion dollars) to employees last year before any revelations about worthless assets on Merrill’s balance sheet became known.
2) Merrill Lynch CEO Thain spent (after the acquisition and receipt by BOA of billions in TARP funding) over $1,000,000 refurbishing his Manhattan office, including:
Area rug: $87,784
Mahogany pedestal table: $25,713
19th Century Credenza: $68,179
Pendant Light Furniture: $19,751
4 pairs of curtains: $28,091
Pair of guest chairs: $87,784
George IV chair: $18,468
6 Wall Sconces: $2,741
Parchment waste can: $1,405
Roman Shade Fabric: $10,967
Roman Shades: $7,315
Coffee Table: $5,852
Commode on Legs: $35,115
At a time when tens of thousand of lower level employees are being fired and the corporation’s very existence is dependent upon tax payer bail out funds, it is the height of hypocrisy and irresponsibility to spend taxpayer and shareholder monies in such a fashion. In fact it’s a farce and begs the usual comparisons to the French Revolution and Marie Antoinette.
This, however, is just the beginning of a sordid tale. A $900 Billion dollar stimulus package is following closely behind this TARP bailout and last year’s stimulus package. While there is a comforting thought that can be drawn from the excesses mentioned above (John Thain was held accountable and fired), who is going to hold Congress accountable for the inevitable excesses in the current stimulus proposal?
If a $68,000 dollar credenza for a wealthy banker that is ultimately being paid for via TARP pisses you off, what do you expect to find in a $900 billion dollar spending binge by Congress? We are truly entering an era never seen before in US economic history. The Democrat Congress of 2008 is wholly accountable and responsible for how this disaster plays out. There is no more blaming of Bush to camouflage the base political ambitions of Democrats: this is your financial Katrina Senator Reid and Senator Dodd. The same goes for Senator Schumer and Representatives Pelosi and Hoyer.
What is incredible about the bank bailout is that shareholders of common stock and unsecured creditors of these banks are being made financially whole through the TARP program. To describe that as outrageous is an understatement because these same parties are risk participants in transactions that are routinely discharged (and unpaid) in bankruptcy courts every day in this country. Whence the preferential treatment? Where are PelosiCo & Reid on this question (if they even understand it)?
The blog Clusterstock has a very good analysis of the pending disaster that is appropriately titled “Preventing The Greatest Heist In History“. It’s a bit heavy with financial data but all are encouraged to read it because, among other things, it makes the domestic auto bailout look microscopic compared to the financial industry fiasco that is the responsibility of the Democrat majority.
Hat Tip: Dealbreaker