Gold News

Gold vs. Merrill's $35,000 Commode

Merrill Lynch just awarded $4bn in bonuses before begging $20bn in tax-funded aid...

IT'S COMPANIES LIKE Merrill Lynch that give companies like Merrill Lynch a bad name, writes Eric Fry for The Rude Awakening.

Indeed, the "Thundering Herd" may have established a new high-water mark for Wall Street chutzpah and greed.

Wall Street's extreme greed and perverse sense of entitlement are nothing new, of course. But even so, Merrill's recent behavior merits a dishonorable mention.

In early December '08, Merrill's Compensation Committee – at the behest of then-CEO John Thain – dispensed about $4 billion in bonuses to top management. Did these bonuses represent a just and reasonable reward for a job well done? Let the reader decide. But before deciding, let the reader ask himself, "If no crime occurred, why do Merrill shareholders and US taxpayers feel so violated?"

Here are a few of the pertinent details, courtesy of the Financial Times:

"Merrill and BofA shareholders...voted on December 5 [to approve BofA's takeover of Merrill]. Three days later, Merrill's compensation committee approved the bonuses, which were paid on December 29. In past years, Merrill had paid bonuses later – usually late January or early February, according to company officials.

"Within days of the compensation committee meeting, BofA officials said they became aware that Merrill's fourth-quarter losses would be greater than expected and began talks with the US Treasury on securing additional TARP money.

"Last week, BofA said it would be receiving $20bn in Tarp money, in addition to the $25bn that had been earmarked for it and Merrill last year. It was then revealed that Merrill had suffered a $21.5bn operating loss in the fourth quarter."

Did you follow all that? Merrill's compensation committee doled out $4 billion in bonuses just days before Merrill's management went cap-in-hand to Washington to beg for $20 billion. And why did they go begging for more taxpayer dollars? Because about the time the Merrill execs were cashing their bonus checks, they "discovered" that the firm's fourth quarter would produce an "unexpected" loss of $21 billion.

Here's my question: If the $21 billion loss was such a shock to the top executives at Merrill Lynch, why did these folks receive any bonuses at all...?

Any finance company executive who could have been shocked by a large loss in the fourth quarter should be tending sheep for a living, or issuing driver's licenses, because that executive knows absolutely nothing about the financial markets here on planet earth.

So who ordered these large, premature bonuses at Merrill, you may be asking? The man himself, John Thain. Remember, this is the guy who cashed a $15 million check one year ago, just for agreeing to come over and redecorate the corner office while Merrill completed its death spiral.

Thain spent about $1.2 million to adorn his office with ostentatious baubles of one sort or another. His preposterous purchases included an $87,000 rug...a $68,000 "19th century credenza"...and a $35,000 "commode on legs".

Thirty-five thousand seems like a lot of money for a "commode on legs"...until you consider that Merrill paid $15 million for Thain.

Fortunately, Thain's abuse of power ended abruptly last week, as Bank of America CEO Ken Lewis pushed him out the door. But let's weep not for Thain. He rides off into the sunset on a pony we taxpayers purchased for him, and carries saddlebags brimming with our wealth...if not our Gold.

Unfortunately, there is no posse in pursuit. Where are the white hats when we need 'em? Where are the hangin' judges? Is Thain's behavior so different from Bernie Madoff's, the man who orchestrated a massive hedge fund fraud?

Madoff tried to dispense $300 million to friends, immediately before his arrest. Thain successfully dispensed more than $4 billion to friends, immediately before asking the government for $20 billion more.

Which one of these frauds is more criminal?

For as long as America's hanging judges let the horse thieves to ride out of town, the American financial markets will remain a perilous destination for investment capital. Without true law and order, the financial markets will merely consume capital, not multiply it.

As long as CEOs may engage in legal acts of corruption and fraud, a mattress will provide better returns than the stock market. Therefore, the cautious investor will want to invest even more cautiously than usual. And he will want to be as certain as possible that he is investing alongside an honorable management team.

Of course, the cautious investor might also consider the sorts of investments that CEOs cannot destroy. Commodities come to mind.

Crude oil, wheat and Gold Bullion do not care how many commodes John Thain buys with taxpayer money, or how many billions of dollars worth of unwarranted bonuses he doles out to fellow insiders. The commodity markets only care about supply and demand...and that's about all.

For the moment, commodity demand is slowing and commodity prices are plummeting. But past performance is not necessarily indicative of future returns. On a 3- to 5-year view, commodities and hard assets now seem severely undervalued.

Consider the following data point: During the last six months the BKX Index of Bank Stocks has fallen 41%. Hardly a surprise. But over the same time frame, the CRB Index of commodity prices dropped more than 50% and the Goldman Sachs Commodity Index has plummeted 65%.

One or more of these markets looks likely to bounce – and bounce hard. It's unlikely to be the banks, we believe.

Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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