Saturday, March 14, 2009

Merrill's bonus imbroglio is just another case of cooked books

Bank of America wants us to believe it is just a "misunderstanding." They also want us to believe that disclosing the names of who received the bonuses would do "irreparable harm" for the firm.

Let's just look at a couple of facts first.

A couple of weeks ago, we found out that a Merrill Lynch trader in London, who said that he made $120 million for the firm actually lost $400 million.

This was, of course, labeled a misunderstanding, a $520 million swing of misunderstanding.

But it wasn't just London, that had these misunderstandings.

Look what AG Cuomo has to say:

The Office has also learned that, less than a week after Merrill voted its premature bonuses, Merrill determined that it would incur an unexpected additional $7 billion in losses for the fourth quarter of 2008, beyond the $8 billion it was already anticipating (Id. at Ex. D at 9-11 and Ex. H at 128-29). It appears that some of these losses may have been booked by Merrill employees who marked down their portfolios only after their 2008 bonuses were set (Id. at Ex. W). Despite the gargantuan unexpected losses, Merrill did not reconsider its bonus awards (which had been voted but not yet paid out) and Bank of America neither requested nor demanded that Merrill reduce its bonus pool (Id. at Ex. C at 106-07, Ex. D at 115-17, Ex. E at 86, and Ex. H at 28). Again, these material developments were undisclosed to the company's shareholders or to the legislators considering how to salvage the American banking system (Id. at Ex. C at 146-49).

Compensation is supposed to be "in proportional to success achieved." The names need to be disclosed on who was paid, so we can see who cooked their derivative books the weeks before the bonuses were announced, and then who changed their books afterwards when they were paid.

The only difference between Merrill's New York office and London, is that Merrill traders reversed their fictional "marks" early, while London's Mr. Stenfors left his fictional pricing on their books. In London, the misunderstanding was $520 million; in New York, it was $7 billion.

Before the deal with BofA was set, Merrill had set aside $5.8 billion for bonuses, but this was undisclosed! Now we see traders cooked their derivative books and blotters by $7 billion in NY, and $500 million in London, until they got paid their bonuses. Then, these bonus recipients marked down their derivative positions after they cashed their bonus checks. And none, of this, of course was disclosed.

And the Piped Piper of Merrill, John Thain, wanted $40 million for his role, in selling Merrill to a firm that couldn't read the blotters!

The only difference was, he went skiing when the traders changed their marks, and unlike them, Thain, wasn't able to get a bonus that he didn't deserve.

His just didn't repay BofA for his $1.2 million office decorating job!

(How can you be bullish on BAC with this news? Because BAC paid out the bonuses early, so they won't have this compensation expense in Q1. And there may even be a clawback for some of the bonuses that were paid. No bonus or handcuffs? That's an easy trade, even for a trader!)

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