The Deeper Truth About Thain's Ouster from BofA

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Former Merrill Lynch chief executive John Thain

John Thain's swift departure as head of Bank of America's (BofA) Merrill Lynch unit after a 15-minute dustup with his boss, CEO Ken Lewis, is a consequence of friction that occurs when conflicting business maxims come into contact. And the fact that Thain must really love to ski.

In business and government organizations, taking care of your own is basic protocol. Following every merger — even a distressed one, and Merrill was clearly the weaker entity — bosses on both sides start building the trench lines to protect as many of their people as possible. Are sacrifices made? Sure, that's expected, but you don't give up your guys easily. (See the worst business deals of 2008.)

Thain played by that rule even though he was relatively new to Merrill, having arrived 14 months ago from the New York Stock Exchange. But he infuriated Lewis by paying out a couple of billion bucks in bonuses before the deal had closed and before disclosing to Lewis that Merrill was going to produce $15 billion in losses for the quarter. Hey, he was just taking care of his people. What's the problem?

The problem was that in doing so, Thain broke another cardinal rule: Don't surprise the boss — especially on the negative side. Lewis was reportedly apoplectic about the size of Merrill's losses in the fourth quarter. But here's a question: What were BofA's risk managers doing? When BofA did its due diligence, it certainly went over Merrill's trading book. If the losses were tied to positions that had already been taken, then shame on BofA. If Merrill's traders made bad bets in the fourth quarter, it's worth asking again, Where were BofA's risk and compliance troops? Wouldn't you want to be all over these people, especially in Q4? Or maybe they all took John Thain at his word when, in October, he said, "We continue to reduce exposures and deleverage the balance sheet prior to closing the Bank of America deal." Those words were surely reassuring, but isn't the whole idea of financial risk management that you don't take anyone at his or her word? (See the top 10 financial collapses of 2008.)

Thain's third corporate sin was awfully dumb: Never, never have a better office than your boss. On Wall Street, kitting out your office with everything from a fireplace to Renaissance art is a sport in itself. My decorator is better than yours, hence I am smarter than you. I have more swag. Thain reportedly spent a million big ones buying chintz and fancy commodes. That number is probably an exaggeration, but if you've been in bankers' offices outside New York City, you know that they are seldom visited by interior decorators. Boring is beautiful in Main Street banking. (See the top 10 bankruptcies.)

Then there's Vail. Having known about the big upcoming losses, Thain nevertheless went ahead with a previously planned vacation to the Colorado ski resort, where he has a place. You really can't blame the guy — conditions were awesome! Vail and the rest of Colorado got absolutely hammered with snow in December. And if you've ever been in the back bowls at Vail in a foot of fresh powder, you can understand Thain's thinking: Let's see, I can ski in perfect conditions in one of the most beautiful places in America or I can stay in New York City and face all the nastiness that's going to happen whether I'm there or not. Thain got on the plane.

He's not the first corporate honcho to choose Vail instead of a corporate showdown. Years ago, N.J. Nicholas Jr., then the co-CEO of Time Warner (TIME's parent company), was vacationing in Vail when he was summoned by the board. Nick was about to become the ex-co-CEO, having lost a power struggle to Gerald Levin, the man who would later sell the company to AOL. (That worked well, didn't it?) Nicholas declined. He knew the game was over. He got on the lift instead. (See pictures of TIME's Wall Street covers.)

Of course, there's always a chance that what is going on here is very different than it appears. Perhaps things weren't that bad when Thain decided to take off to Vail, and then Lewis got ahold of Merrill's books and decided to make them look worse than they actually were. Too dastardly, you say? Maybe, but Lewis could use the illusion of a bigger loss to get money from the government and at the same time get rid of Thain. What's more, if Lewis hangs on, the latest loss makes 2009 earnings look better than they otherwise would. The only problem with this theory is that it's very risky for Lewis, because the big loss at Merrill makes him look bad too and puts him at risk as well.

Our advice to Ken: Don't go skiing.

— With reporting by Stephen Gandel

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