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John Thain and the curse of being No. 2

On Wall Street, when the going gets rough, the second-in-command gets the ax.

By William Cohan, contributor
Last Updated: January 24, 2009: 11:30 AM ET

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John Thain could not have served himself up for slaughter any more obligingly than he did.
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(Fortune) -- Even before the revelations of the undisclosed massive losses, the early payment of billions of dollars in bonuses, and the delicious $87,000 rug, John Thain's days at Bank of America working for Ken Lewis were clearly numbered.

For the simple reason that when things start getting dicey on Wall Street, even in its present devolved state, being No. 2 on the totem pole is by far the riskiest and most dangerous position of all.

So as Bank of America's (BAC, Fortune 500) stock spiraled downward some 40% in the first three weeks of 2009, following the Jan. 1 closing of its acquisition of Merrill Lynch, into the mid single digits, and the pressure began mounting on Lewis to explain how he could possibly have agreed to pay $29-a-share -- some $21 billion in stock by the end -- for a nearly bankrupt Merrill Lynch, it became increasingly obvious that either Thain or Lewis had to go.

Even though it was Lewis, and Lewis alone, who agreed to save Merrill from a fate not dissimilar to that of Lehman Brothers or Bear Stearns with a minimum of due diligence during the fateful weekend of Sept. 13-14, by the immutable laws of Wall Street power and loyalty, Thain was the one to be jettisoned. This much was obvious.

Thain, to his credit, appeared to understand his role well. He could not have served himself up for slaughter any more obligingly than he did. First, there were the unexpected departures of two senior Merrill executives Greg Fleming and Robert McCann, due, in part, to their reported clashes with Thain, an ex-Goldman Sachs co-president who had been brought in to Merrill in late 2007 after the "retirement" of CEO Stan O'Neal. Strike one.

Then there was the late disclosure of billions in fourth-quarter trading losses, which may have derailed the merger had Thain disclosed them before the Merrill and Bank of America shareholders voted on the merger on Dec. 5. Strike two.

Then there was Thain's end-of-year Vail vacation and his desire to head off to Davos, even though Lewis recommended against it. Strike three.

Then came the billions in bonuses paid a month earlier than Merrill had paid bonuses in the past (although, in fairness, Wall Street firms about to be swallowed up in an end-of-year merger tend to pay bonuses just before the takeover is completed). Strike four.

And then, the piece de resistance: the revelation by Thain's enemies that he had foolishly spent $1.2 million redecorating his office at a time when Merrill's prospects were dimming rapidly and major layoffs were looming. Had Thain not remembered Dennis Kozlowski? One can only assume that Thain must have asked Michael Smith, his fancy Los Angeles decorator, to measure the rope for the noose while he was at it.

Few before him have made their new boss look as bad, as quickly, as did Thain. On the other hand, on Wall Street, there is a long and distinguished list of heir-apparents jettisoned by their bosses as the barbarians were at the gate.

In this current crisis alone, we have enjoyed being able to watch Stan O'Neal, the CEO of Merrill before Thain, fire Dow Kim and Osman Semerci, among others; John Mack, the CEO of Morgan Stanley, serve up his president Zoe Cruz; Jimmy Cayne, then CEO of Bear Stearns, decapitate co-president Warren Spector; and Dick Fuld, then CEO of Lehman Brothers, lop off Joe Gregory, the firm's president, and Erin Callan, its CFO.

At Citigroup, the practice has a long and distinguished history. Sandy Weill eliminated both John Reed and Jamie Dimon. Chuck Prince, when he was CEO of Citigroup, extinguished Tommy Maheras and Todd Thomson, his onetime CFO. When Vikram Pandit took over from Prince he zotzed Michael Klein. At Lazard, the longtime patriarch Michel David-Weill coldly dismissed Felix Rohatyn, Steve Rattner, Bill Loomis and even his son-in-law Edouard Stern.

The sad truth is that the strategy of forcing others to take the fall for your poor decisions can only work so long. Nobody forced Bank of America to buy Countrywide Financial or Merrill Lynch. These were both ego buys, with a dash of patriotic duty thrown in for good measure. They weren't necessary for Bank of America to keep doing well at what it was doing.

Ken Lewis, you even knew better, when you famously said, in October 2007, "I've had all the fun I can stand in investment banking right now."

In any event, Ken, you are all alone on the front line now. Just ask O'Neal, Cayne, Fuld, Prince and David-Weill if you don't believe me.

Cohan is author of "The Last Tycoons: The Secret History of Lazard Freres & Co" and the upcoming "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street." To top of page

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