“Regulators are supposed to tell you to obey the law, not to disobey the law. If you’re the CEO, your first obligation is not to your regulator, it’s to your institution and shareholders.”

-Jonathan R. Macey, deputy dean of Yale Law School


I have not commented on the allegations by Bank of America CEO Ken Lewis that he was forced into making a disastrous acquisition of Merrill Lynch.

Why? Because they appeared to me be utter and shameless nonsense, an attempt to worm out of responsibility.  Indeed, the very statements by Bank of America CEO Ken Lewis appeared to be excuse-making for a lousy acquisition (which Bof A has quite the history of). Its the sort of weasely responsibility evading CEO speak we have come to expect these days. To be blunt, I was astonished anyone took them very seriously.

Yet they were taken seriously, by quite a few people — including a huge front page Wall Street Journal article. The mere accusation means that we are likely to see former Treasury Secretary Hank Paulson — a major cause of the credit crisis and a horrific bailout steward — up for a major grilling in Congress.

This morning, in the same WSJ venue, we learn that many of the statements Ken Lewis made under oath were directly contradicted by former Merrill CEO John Thain (but not under oath). Thain claims these understandings were in in writing.

One of these  two CEOs is lying, and if its the guy who was doing so in sworn testimony, he may have a very big problem on his hands.

Here’s the WSJ on Thain’s claims:

“In an effort to restore his sullied reputation, the 53-year-old Mr. Thain is striking back at Bank of America Corp. He claims the bank lied about its role in the giant bonuses and losses at Merrill Lynch & Co. that cost Mr. Thain his job in January, after Bank of America bought the troubled brokerage.

“Getting fired is one thing. But nobody has the right to say things that they know aren’t true,” said Mr. Thain, who had been Merrill’s chief executive, during one of a series of interviews with The Wall Street Journal.

Charlotte, N.C.-based Bank of America has stated publicly that the decision to pay bonuses to Merrill employees in December rather than in January, when they usually go out, was solely Mr. Thain’s. News of the $3.62 billion in bonuses sparked a public outcry, badly damaging Mr. Thain’s reputation.

But Mr. Thain says that he and Bank of America Chief Executive Kenneth Lewis agreed in writing that the bonuses could be paid before Bank of America’s acquisition of Merrill closed, which led to the early payments. “The suggestion Bank of America was not heavily involved in this process, and that I alone made these decisions, is simply not true,” he says.

Bank of America has painted a different picture than Mr. Thain’s of critical decisions that were made last fall. It has cast him as the person responsible for distributing billions of dollars of bonus money despite Merrill’s huge losses. Before Mr. Thain’s recent discussions with the Journal, he had refrained from commenting in depth. (emphasis added)

This is beginning to look like a variation of the prisoners dilemma: Both parties would probably be better off if everyone kept quiet, but each individual party is better off confessing than remaining silent.

And both of these guys cannot be telling the truth . . .


Thain Fires Back at Bank of America
WSJ, April 27, 2009


Lewis Testifies U.S. Urged Silence on Deal
Liz Rappaport
WSJ, April 23, 2009


See also:
Paulson’s ‘Gift’ to Lewis Delivered at Gunpoint
Caroline Baum
Bloomberg, April 27 2009


U.S. Role Questioned on Merrill  
NYT, April 23, 2009


Category: Bailouts, Legal, M&A, Regulation, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “The Prisoners Dilemma: John Thain vs Ken Lewis”

  1. dead hobo says:

    The SEC won’t do anything about it, no matter what is revealed; for the good of the country. Civil lawsuits that hold Lewis and/or Thane personally responsible will be the only recourse. Financial crooks have a free ride in the US if they run a bank.

  2. VennData says:

    My money’s on “all of them are lying” …but hey, that’s just me.

  3. Transor Z says:

    Does an improper threat to a CEOs and/or Board’s position by Treasury relieve them of their fiduciary duties to the shareholders? IOW, if Ken Lewis and Cuomo are correct that Paulson threatened to remove Lewis and Board members if they didn’t close on the Merrill deal, were they still obligated to disclose this to shareholders or resign because their positions had been compromised by the threat?

    Interesting analysis under Prisoners Dilemma. Shareholders continue to be screwed as a consequence of both men’s “defection” because the clear implication is that BoA is a weaker company for having absorbed ML.

  4. Marcus Aurelius says:

    “One of these two CEOs is lying, and if its the guy who was doing so in sworn testimony, he may have a very big problem on his hands.”

    We don’t prosecute high-level corporate or governmental crimes any more. We “move on” (apparently looking back is too ghastly and wasteful, and the concept of law enforcement is archaic).


  5. rktbrkr says:

    Time for a round of Liars Poker with Paulson, Thain, BB, Lewis and Geithner all at the table.

    Lewis has access to all kinds of legal advice any one of them would have told him that Paulson threat was illegal.

    I think we will hear eventually that although Paulson might not have actually threatened to fire Lewis and the BOD (which hw couldn’t do anyway) Lewis “FELT” threatened.

    This Q bought Lewis some time but he’s got to go. It’s time for distancing by the BAC BOD because now they feel “threatened”!

  6. [...] Picture: Barry Ritholz on the ongoing dispute between Bank of America’s chief executive, Ken Lewis, and former Merill Lynch chief, John [...]

  7. larster says:

    They’ll find the financial equivalent of some West Virginia National Guardsmen and string them up, while the bosses receive a get out of jail free card.

  8. Chief Tomahawk says:

    BR, i.e. the Swine Flu: I can see the ready made excuse for poor Q2 earnings being “stinky”.

  9. cjcpa says:

    looking for that long-awaited cascade …..

    Futures point to lower open…

  10. dead hobo says:

    Copper is finally going down and on just this side of freefall. NatGas is $3.16 going to the high $2. Speculative cash is leaving oil. Pork is going to make my favorite center cut pork chops very cheap for a while … time to load the freezer. Somebody finally yelled ‘Fire’ in a crowded theater. Headline writers and newsies will give swine flu the credit (maybe for pork it’s ok, people are stupid about these things).

  11. franklin411 says:

    I predict this “swine flu” will be as horrid as the last outbreak. In 1976, one man died of swine flu and President Ford launched a massive program to rush a vaccine to the people. Guess what? More people died or were rendered seriously ill by the faulty vaccine than died in the outbreak. In fact, the guy whose death started the panic was the *only* death from swine flu in 1976!

  12. leftback says:

    For once I agree with Franklin that this flu outbreak is not likely to be “the big one”. Nevertheless it is another virus in the mix, and there is a distinct possibility that future mutations in this virus could result in something more virulent in the future. This thing is obviously easily transmitted.

    My kitchen sink has gained in value since Friday. I don’t see the swine flu as contributing much to a significant sell-off except maybe in the airlines. As usual we are all watching the banks and I have my eyes on the usual technical levels. Weakness in the FXI is interesting since that is far from this infection. Yes?

  13. EarlGrey says:

    Lewis knew Merill Lynch was a bad bet, but he had to make sure Bank of America was too big to fail. He didn’t want to become another Lehman. It worked.

  14. franklin,

    “… Guess what? More people died or were rendered seriously ill by the faulty vaccine than died in the outbreak…”

    nice point, just remember, “Vaccine safety” hasn’t improved much, if at all, since then..

    here’s a different take on the std. “Vaccines are good for you”-message..

  15. leftback says:

    I suspect we are approaching a time when Paulson, Lewis and Thain are in Congress. It is likely that there will be difficulties in recollecting several conversations. I expect that we will hear the phrase “I do not recall that conversation” a fair amount.

    Overall this will be a lot like the baseball steroid hearings with McGwire, Sosa and Tejada. We knew they did it, they knew they did it, but nobody is going to actually SAY they did it. Then we will be left with the perjury trials and immunity deals later on. Probably much later on.

  16. MRegan says:

    Ft. Detrick-swine flu-tamiflu-roche-gilead sciences-Rumsfeld

    1976 Ford-Rumsfeld

    They are watching the barium isotope move through the system.


    This was there counter to the torture play. We are watching chess w/psychopaths.

  17. MRegan says:

    their counter-sorry

  18. Mannwich says:

    And this behavior typifies our so-called “leadership” everywhere today in this country. Just sad. Calling all leaders, calling all leaders. The leadership void in this country is just stunning but should we really be surprised it’s like this when the motto for the past 3 decades+ in this country has been “every man (woman and child) for himself”?

  19. karen says:

    Possible H & S (bearish) on 10 minute charts for $indu, $spx, and $compq… actually, they all look nearly identical.. so bears can still hope : )

  20. ben22 says:


    No country is ever far from this type of infection anymore, too much global travel for that IMO.

    I agree with you though, I don’t think this is the big one.

    Talked with a Polymer scientist Phd. buddy of mine that works at P&G this weekend. He says the bigger fear right now for them is bacteria we normally wash from our hands with hand soap, or that we clean from our mouths with toothpaste. Apparently the bacteria are becoming immune to it.

  21. how much does Ken Lewis love Swine Flu today?

  22. jz says:

    Barry, it did cross my mind that Lewis was lying but what he said he said under oath. And given all the fear we saw in the markets when Lehman failed, what Lewis claimed Paulson and Bernanke said sounded credible to me. FWIW, Paulson and Bernanke have not actually rushed out and called Lewis a liar. I can’t remember but I think PR folks for Paulson or Bernanke quoted one of these guys stating “my words were my own” whatever that meant.

    As far as the bonuses go, my money is on Thain telling the truth. Golden parachutes of the type that ML had built for the BofA takeover used to be business as usual. When ML turned out to be a bigger turd than anyone at BofA or inside the fed imagined, then and only then did outrage turn on Mr. Thain. My guess is that Thain turns out to be your typical greedy, unethical Wall Street scumbag but not a criminal.

  23. TripleB says:

    Cue the 60 Minutes interview that Lewis gave last year to Leslie Stahl.

    It was Saturday morning, September 13. John Thain, the CEO of Merrill Lynch, was on the line. Lehman was on its death bed; Merrill Lynch was said to be next.

    “You always wanted Merrill Lynch,” Stahl said.

    “We’ve always thought that was the best thing for us,” Lewis said.

    “You were drooling for Merrill Lynch,” she said.

    “We have always felt it was.”

    Deals of this magnitude take months of due diligence and vetting. This deal was thrown together over a weekend, with Bank of America spending $50 billion to buy one of Wall Street’s emblematic companies.

    But now B of A is exposed to Merrill Lynch’s poisonous investments and continuing losses.

    The question is: Did Ken Lewis pay too much?

    “Some think that we should’ve waited till Monday and see if they would’ve gone bankrupt,” he said. “Some think we would’ve gotten it for, you know, dirt cheap. But my point is, you would have a tarnished brand. You would’ve had chaos. You would’ve had a court ruling over all the sale of assets. And it was worth it to us to pay a more market price so that we could not have that happen.”

  24. Moss says:

    Have Dick Cheney water board them both at get to the truth.

    Too bad that quote by Macey has been sullied by the banksters. It may look good in a text book but in the real world that is not what happened.

    Their first obligation was to themselves and other managers in the form of compensation maximization. They trashed the institutions and shareholders.

  25. greg says:

    Why would anybody take a meeting with a politician, without recording it, secretly if need be?

  26. kaleberg says:

    Transor Z mentions “their fiduciary duties to the shareholders”. Under U.S. law, corporate officers and board members have no fiduciary duty to the shareholders. That’s none, zilch, nada. They have a fiduciary duty to the corporation. That’s it.

    Back in the 18th & 19th centuries, a corporation was a contract between the state, the corporate founders and the shareholders, so the government had a lot more influence on corporate behavior. Starting in the 1830s, the state started dropping from the equation, but at no time did anyone have a fiduciary duty to the owners of the company.

    (For more on this, read the classic, Berle & Means, The Modern Corporation and Private Property. It was written in the early 30s, but it is still a great read and still quite relevant.)

  27. jasonch says:

    Barry – Great post! I really love the way that you’ve taken the facts of these case and presented them in the context of the prisoner’s dilemma. Brilliant.

    I was familiar with the conversations between Lewis and Paulson/Bernanke. Thain’s comments, even if not under oath, add a whole new dimension.

  28. http://serendip.brynmawr.edu/playground/pd.html
    Cooperation is usually analysed in game theory by means of a non-zero-sum game called the “Prisoner’s Dilemma” (Axelrod, 1984). The two players in the game can choose between two moves, either “cooperate” or “defect”. The idea is that each player gains when both cooperate, but if only one of them cooperates, the other one, who defects, will gain more. If both defect, both lose (or gain very little) but not as much as the “cheated” cooperator whose cooperation is not returned. The whole game situation and its different outcomes can be summarized by table 1, where hypothetical “points” are given as an example of how the differences in result might be quantified.