Nov. 5, 2010
BOOK REVIEW: 'Crash of the Titans'
Fly-on-the-Wall Look at How Iconic Merrill Lynch Fell and America's Biggest Bank Nearly Collapsed
Reviewed By David M. Kinchen
J. Steele Alphin may have been a dedicated human resources executive of what author Greg Farrell describes as the near cult of Charlotte, NC-based Bank of America, but he certainly hit the nail on the head when he placed part of the blame for the meltdown of iconic Merrill Lynch on the "nonstop focus on bonus checks" that permeated Wall Street.
Farrell's "Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near Collapse of Bank of America" (Crown Business, 480 pages, $27.00) quotes Alphin -- discussing John Thain, Merrill Lynch's CEO -- as an essentially decent man who was corrupted by the culture of Wall Street, a culture that ate like acid into even the best and the brightest: "In so many ways, John Thain was a brilliant man. His understanding of the business was unparalleled. But he had some blind spots....Alphin came to view Thain's focus on money as symptomatic of Wall Street's out-of-control bonus culture."
Farrell says Alphin, who had far greater power in the Bank of America run by CEO Ken Lewis than personnel executives at the typical company, understood that Thain "was right to ask for a certain level of compensation" as Merrill Lynch was about to be absorbed into the maw of Bank of America. Unlike Thain, who had an engineering degree from the Massachusetts Institute of Technology (MIT) and a master's in business administration from Harvard Business School, Alphin "didn't go to an Ivy League school, and he wasn't even the top student at the school he attended. But he understood a few things about Wall Street. The whole reason everything came crashing down in 2008 was twenty-five years [for Thain] of nonstop focus on bonus checks, on compensation. Why did Lehman Brothers go out of business? Because their people kept doing real estate deals long after the market had turned. It produced bigger bonuses for them."
Farrell's book concentrates on three CEOs -- Thain, his predecessor at Merrill Lynch, E. Stanley O'Neal, and Ken Lewis of BofA -- but he doesn't neglect the other players in his comprehensive look at the two companies. I only wish the publishers had included photos of these players in a book that is otherwise well annotated and documented and -- yes -- it has an index.
Merrill Lynch, founded in 1914 by Charlie Merrill, was an exception to the insular, inbred culture that has characterized the firms that make up what most people think of as Wall Street, Farrell writes. Merrill Lynch (Charlie was joined in 1915 by Edmund Lynch) revolutionized the stock market by bringing Wall Street to Main Street, setting up offices in smaller cities and towns long ignored by the giants of finance. With its “thundering herd” of financial advisers, perhaps no other business, whether in financial services or elsewhere, so epitomized the American spirit. Merrill Lynch was not only “bullish on America,” it was a big reason why so many average Americans were able to grow wealthy by investing in the stock market.
Merrill Lynch was an icon. Its sudden decline, collapse, and sale to Bank of America was a shock. How did it happen? Why did it happen? And what does this story of greed, hubris, and incompetence tell us about the culture of Wall Street that continues to this day even though it came close to destroying the American economy? A culture in which John Thain, the CEO of a firm losing $28 billion pushes hard to be paid a $25 million bonus. A culture in which two Merrill Lynch executives are guaranteed bonuses of $30 million and $40 million for four months’ work, even while the firm is struggling to reduce its losses by firing thousands of employees.
Based on unparalleled sources at both Merrill Lynch and Bank of America, and hundreds of hours of interviews, Farrell e examines in detail Antioch, Illinois native Thain and O'Neal, an African-American whose inspiring rise from the segregated South to the corner office of Merrill Lynch — where he engineered a successful turnaround — was undone by his belief that a smooth-talking salesman could handle one of the most difficult jobs on Wall Street. Because he enjoyed O’Neal’s support, this executive was allowed to build up an astonishing $30 billion position in CDOs on the firm’s balance sheet, at a time when all other Wall Street firms were desperately trying to exit the business. And finally Ken Lewis, a street fighter raised just a tad above the poverty level on a Georgia farm.
Thain was the cerebral technocrat whose rescue of the New York Stock Exchange, after a brilliant career at Goldman Sachs, earned him the nickname “Super Thain.” He may have thought himself the smartest man in the room, but he disappeared for two weeks on a family skiing vacation in Colorado at a critical time for the merger, in December 2008. Farrell writes that Thain was hired from his post at the NYSE to save Merrill Lynch in late 2007, but his belief that the markets would rebound led him to underestimate the depth of Merrill’s problems.
The third flawed man, Ken Lewis, epitomized the Charlotte-based banking giant's “my way or the highway” management style and made a $50 billion commitment over a September weekend to buy a business he really didn’t understand, thus jeopardizing his own institution. In many respects the Bank of America headed by Lewis resembled Dr. Victor Frankenstein's creature, assembled from dissimilar body parts -- regional banks -- from different parts of the nation: Among them California's Bank of America; Georgia's C&S/Sovran; Boston's Fleet Financial; Florida's Barnett Bank, and the two North Carolina banks that became North Carolina National Bank (NCNB) and later NationsBank, renamed Bank of America after the 1998 acquisition of the iconic San Francisco-based bank founded in 1904 by A.P. Giannini, the California-born son of Italian immigrants.
The merger of Merrill Lynch and Bank of America itself turned out to be a bizarre combination of cultures that blend like oil and water, where Farrell says slick Wall Street bankers suddenly find themselves reporting to a cast of characters straight out of the Beverly Hillbillies. BofA’s inbred culture, which perceived New York banks its enemies, was based on loyalty and a good-ol’-boy network in which competence played second fiddle to blind obedience. Ken Lewis's BofA proudly called itself the "Walmart" of banking, a comparison that grated on the city slickers from Merrill Lynch.
The chapter names as the merger came close to reality ---"Sunday Bloody Sunday," "The Boston Mafia," "The Charlotte Mafia," "Welcome to the Asylum" -- lend a grand guignol financial thriller aspect to Farrell's tome, as the historic events of the financial crisis unfold and people responsible for billions of dollars of other people’s money gamble recklessly to enhance their power and their paychecks or to save their own skins.
* * *
Greg Farrell is a correspondent for the Financial Times. In January 2009, he broke the news that Merrill Lynch had paid out its 2008 bonuses a month ahead of schedule, in December, even though Merrill was in the process of losing $28 billion for the year, and Bank of America needed an extra $20 billion in taxpayer funds to complete its acquisition of the firm. That story sparked an investigation by New York attorney general Andrew Cuomo, who was elected governor of New York on Nov. 2, 2010. Farrell is a past winner of the American Business Press’s Jesse Neal Award for investigative reporting and a recipient of the Knight-Bagehot Fellowship for business journalism. He earned a BA from Harvard University and an MBA from the Graduate School of Business at Columbia University.
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BOOK REVIEW: 'Crash of the Titans'
Fly-on-the-Wall Look at How Iconic Merrill Lynch Fell and America's Biggest Bank Nearly Collapsed
Reviewed By David M. Kinchen
J. Steele Alphin may have been a dedicated human resources executive of what author Greg Farrell describes as the near cult of Charlotte, NC-based Bank of America, but he certainly hit the nail on the head when he placed part of the blame for the meltdown of iconic Merrill Lynch on the "nonstop focus on bonus checks" that permeated Wall Street.
Farrell's "Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near Collapse of Bank of America" (Crown Business, 480 pages, $27.00) quotes Alphin -- discussing John Thain, Merrill Lynch's CEO -- as an essentially decent man who was corrupted by the culture of Wall Street, a culture that ate like acid into even the best and the brightest: "In so many ways, John Thain was a brilliant man. His understanding of the business was unparalleled. But he had some blind spots....Alphin came to view Thain's focus on money as symptomatic of Wall Street's out-of-control bonus culture."
Farrell says Alphin, who had far greater power in the Bank of America run by CEO Ken Lewis than personnel executives at the typical company, understood that Thain "was right to ask for a certain level of compensation" as Merrill Lynch was about to be absorbed into the maw of Bank of America. Unlike Thain, who had an engineering degree from the Massachusetts Institute of Technology (MIT) and a master's in business administration from Harvard Business School, Alphin "didn't go to an Ivy League school, and he wasn't even the top student at the school he attended. But he understood a few things about Wall Street. The whole reason everything came crashing down in 2008 was twenty-five years [for Thain] of nonstop focus on bonus checks, on compensation. Why did Lehman Brothers go out of business? Because their people kept doing real estate deals long after the market had turned. It produced bigger bonuses for them."
Farrell's book concentrates on three CEOs -- Thain, his predecessor at Merrill Lynch, E. Stanley O'Neal, and Ken Lewis of BofA -- but he doesn't neglect the other players in his comprehensive look at the two companies. I only wish the publishers had included photos of these players in a book that is otherwise well annotated and documented and -- yes -- it has an index.
Merrill Lynch, founded in 1914 by Charlie Merrill, was an exception to the insular, inbred culture that has characterized the firms that make up what most people think of as Wall Street, Farrell writes. Merrill Lynch (Charlie was joined in 1915 by Edmund Lynch) revolutionized the stock market by bringing Wall Street to Main Street, setting up offices in smaller cities and towns long ignored by the giants of finance. With its “thundering herd” of financial advisers, perhaps no other business, whether in financial services or elsewhere, so epitomized the American spirit. Merrill Lynch was not only “bullish on America,” it was a big reason why so many average Americans were able to grow wealthy by investing in the stock market.
Merrill Lynch was an icon. Its sudden decline, collapse, and sale to Bank of America was a shock. How did it happen? Why did it happen? And what does this story of greed, hubris, and incompetence tell us about the culture of Wall Street that continues to this day even though it came close to destroying the American economy? A culture in which John Thain, the CEO of a firm losing $28 billion pushes hard to be paid a $25 million bonus. A culture in which two Merrill Lynch executives are guaranteed bonuses of $30 million and $40 million for four months’ work, even while the firm is struggling to reduce its losses by firing thousands of employees.
Based on unparalleled sources at both Merrill Lynch and Bank of America, and hundreds of hours of interviews, Farrell e examines in detail Antioch, Illinois native Thain and O'Neal, an African-American whose inspiring rise from the segregated South to the corner office of Merrill Lynch — where he engineered a successful turnaround — was undone by his belief that a smooth-talking salesman could handle one of the most difficult jobs on Wall Street. Because he enjoyed O’Neal’s support, this executive was allowed to build up an astonishing $30 billion position in CDOs on the firm’s balance sheet, at a time when all other Wall Street firms were desperately trying to exit the business. And finally Ken Lewis, a street fighter raised just a tad above the poverty level on a Georgia farm.
Thain was the cerebral technocrat whose rescue of the New York Stock Exchange, after a brilliant career at Goldman Sachs, earned him the nickname “Super Thain.” He may have thought himself the smartest man in the room, but he disappeared for two weeks on a family skiing vacation in Colorado at a critical time for the merger, in December 2008. Farrell writes that Thain was hired from his post at the NYSE to save Merrill Lynch in late 2007, but his belief that the markets would rebound led him to underestimate the depth of Merrill’s problems.
The third flawed man, Ken Lewis, epitomized the Charlotte-based banking giant's “my way or the highway” management style and made a $50 billion commitment over a September weekend to buy a business he really didn’t understand, thus jeopardizing his own institution. In many respects the Bank of America headed by Lewis resembled Dr. Victor Frankenstein's creature, assembled from dissimilar body parts -- regional banks -- from different parts of the nation: Among them California's Bank of America; Georgia's C&S/Sovran; Boston's Fleet Financial; Florida's Barnett Bank, and the two North Carolina banks that became North Carolina National Bank (NCNB) and later NationsBank, renamed Bank of America after the 1998 acquisition of the iconic San Francisco-based bank founded in 1904 by A.P. Giannini, the California-born son of Italian immigrants.
The merger of Merrill Lynch and Bank of America itself turned out to be a bizarre combination of cultures that blend like oil and water, where Farrell says slick Wall Street bankers suddenly find themselves reporting to a cast of characters straight out of the Beverly Hillbillies. BofA’s inbred culture, which perceived New York banks its enemies, was based on loyalty and a good-ol’-boy network in which competence played second fiddle to blind obedience. Ken Lewis's BofA proudly called itself the "Walmart" of banking, a comparison that grated on the city slickers from Merrill Lynch.
The chapter names as the merger came close to reality ---"Sunday Bloody Sunday," "The Boston Mafia," "The Charlotte Mafia," "Welcome to the Asylum" -- lend a grand guignol financial thriller aspect to Farrell's tome, as the historic events of the financial crisis unfold and people responsible for billions of dollars of other people’s money gamble recklessly to enhance their power and their paychecks or to save their own skins.
* * *
Greg Farrell is a correspondent for the Financial Times. In January 2009, he broke the news that Merrill Lynch had paid out its 2008 bonuses a month ahead of schedule, in December, even though Merrill was in the process of losing $28 billion for the year, and Bank of America needed an extra $20 billion in taxpayer funds to complete its acquisition of the firm. That story sparked an investigation by New York attorney general Andrew Cuomo, who was elected governor of New York on Nov. 2, 2010. Farrell is a past winner of the American Business Press’s Jesse Neal Award for investigative reporting and a recipient of the Knight-Bagehot Fellowship for business journalism. He earned a BA from Harvard University and an MBA from the Graduate School of Business at Columbia University.
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