Saturday, January 17, 2009

Liar, Liar, Stock's on fire.

January 17th
Wall Street Journal

Bank of America maintains it went back to the government for more support because of larger-than-expected fourth-quarter losses at Merrill Lynch and that the problems came to light after shareholders approved the Bank of America-Merrill combination on Dec. 5. But 25% of the protected asset pool belonged to Bank of America, Chief Financial Officer Joe Price said Friday, a signal that the problems weren't tied strictly to Merrill's disintegration.

Executives at both Bank of America and Merrill have indicated the losses at Merrill ballooned in mid-December, leading to a meeting between Mr. Lewis and Treasury Secretary Henry Paulson on Dec. 17. However,the market for various credit-related products began to deteriorate in mid-November, leaving many Merrill insiders to ask what Merrill CEO John Thain knew, and when.

Merrill lost $15.3 billion during the period, and the run-up in losses was concentrated in the firm's sales and trading department, run by Tom Montag, who was hired by Mr. Thain in 2008 to run that division. The two frequently told the firm's other top managers that the losses, while significant, were largely connected to so-called legacy positions at Merrill and the losses were "market-related" and not out of step with Wall Street.

Mr. Lewis's credibility among employees may also be suffering. Many are angry not only at how the losses were handled but also that just last week they were issued compensation in the form of shares worth $14.33 apiece, said people familiar with the situation. Several employees questioned how the company could have issued the shares in light of the past week's news, these people said.

Friday, some top executives and members of Merrill's board questioned privately why they weren't told about the magnitude of the losses or that the deal was possibly in jeopardy. Mr. Thain declined to comment on whether he knew about the Dec. 17 meeting between Messrs. Paulson and Lewis.

Mr. Lewis rejected the suggestion Friday that he and his team didn't conduct enough due diligence. "We did not expect the significant deterioration in mid to late December that we saw," he said on a conference call with analysts.

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