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The taming of Merrill.

Article Excerpt
Byline: Geraldine Lambe

The news on October 15 that Bank of America (BofA) CEO Ken Lewis had been pressured into forfeiting his 2009 salary by the US Treasury's special master' for compensation horrified Wall Street and crowned a turbulent 10 months for the bank. Since completing its rescue acquisition of Merrill Lynch, taking $45bn from the government to shore up its own capital base and to help absorb Merrill's 2008 losses, Bank of America has experienced unprecedented government intervention, and aggressive state and Federal regulatory scrutiny.

Mr Lewis has felt the full brunt of the media and regulatory spotlight. Early in the year he was forced to step down as chairman after he and the board of directors were accused of misleading investors about Merrill's mounting losses and the agreement to pay bonuses to Merrill executives. In early September, Federal district judge Jed Rakoff took the unusual step of rejecting a $33m settlement levied by the Securities and Exchanges Commission (SEC), saying that BofA should face a full investigation, not get a "slap on the wrist".

On September 30, in what many assume to be an attempt to take the heat off the bank, Mr Lewis surprised the markets - and the bank - by announcing his early retirement by the end of the year. New York attorney general Andrew Cuomo immediately quashed any notion that he would back down, saying Mr Lewis's retirement would have "no impact" on his investigation.

If the Merrill acquisition has brought Mr Lewis's tenure at BofA to an untimely end, the unwelcome glare of the media and regulators has also exacerbated tensions within the new organisation. The bank has had a rough year, losing a lot of key bankers and fighting fires as much as managing the business. Yet league and revenue tables show that the investment bank has held up surprisingly well, and the combined platform is getting business that BofA alone could only have dreamed of. Much remains to be done and as a whole, the franchise remains heavily exposed to the nervous US consumer, but is Bank of America Merrill Lynch over the worst?

Difficult days

In the dark days of Q1 this year, legacy Merrill Lynch experienced dizzying changes of leadership and lost bankers left, right and centre. First, Greg Fleming, newly appointed as Bank of America Merrill Lynch's (BofA-ML) head of investment banking, left in the first week of January. Many insiders saw this as a potentially fatal blow to the investment bank; he was one of the Merrill leaders seen as critical in holding the investment bank steady during what was expected to be a tricky integration. Moreover, Mr Fleming had built Merrill's world class financial institutions business and helped to create the European platform as a force within Merrill.

In the same week, Bob McCann, previously head of the retail brokerage unit, resigned, followed in short order by Brent Clapacs, co-head of European markets. Then John Thain, who along with Mr Fleming had orchestrated the sale of Merrill to BofA, left the bank less than a month after the deal was completed.

Bank of America's general counsel, Brian Moynihan, was put in charge of the investment bank. He had a wealth of integration experience, but all he could do was watch a procession of more than 20 managing directors leave the bank in three months. Competitors scented weakness and within two months of Mr Fleming's departure, Deutsche Bank hired a dozen of Merrill's financial institutions group (FIG) team, including the three Heaton brothers - Eric, David and Seth - who had worked at Merrill their whole career.

The growing focus on compensation - which led to seven of Merrill's most senior bankers being subpoenaed by Mr Cuomo - touched a raw nerve. Merrill investment bankers, who already felt as if they had paid a heavy price for the actions of the few who took the bank into subprime and built-up a massive exposure to collateralised debt obligations (CDOs), began to feel increasingly uncomfortable in a commercial bank that was under a punishing microscope.

"It is not my business that led to Merrill's losses or the subprime crisis," says one senior mergers and acquisitions (M&A) banker. "We do a deal, and we get paid for it; if we don't do the deal, we don't get paid for it. At the most, even in an underwriting deal, investment bankers put risk on the books for one, two or three weeks."

Loss of key bankers

One by one, BofA-ML lost...