Bank of America CEO Ken Lewis gave former Merrill chief John Thain an unceremonious heave-ho earlier today, a mere month after the Merrill deal closed, after one too many nasty surprises: the deterioration of Merrill in the fourth quarter, the revelation that Merrill effectively stiffed BofA by paying bonuses early, thus depriving the bank of the opportunity to review the payments and ascertain whether they were appropriate.

The Wall Street Journal gives a tidy synopsis:

Bank of America had lost confidence in Mr. Thain….after Mr. Lewis learned of mounting fourth-quarter losses at Merrill from the transition team handling the Bank of America-Merrill merger rather than from Mr. Thain himself. And when Mr. Lewis asked Mr. Thain what happened, the Bank of America CEO did not get a “good explanation for what was happening and why,” this person said…. The Bank of America CEO also concluded Mr. Thain has exercised “poor judgment” on a number of fronts. He left for a vacation in Vail, Colo., after the losses came to light, bonus payments at Merrill were accelerated so they could be collected before the end of the year and Mr. Thain had planned to fly this week to Davos, Switzerland, even though Bank of America had signaled that such a trip was not a good idea, this person said.

And CNBC (with a slideshow) had a bit of fun chronicling some of Thain’s spending as Merrill CEO:

When John Thain became Merrill Lynch’s CEO in early 2008, he hired Michael S. Smith Design to revamp his office suite, spending approximately $1.22 million according to documents…. The following is a list of the items in his suite: Area Rug $87,784

Mahogany Pedestal Table $25,713

19th Century Credenza $68,179

Pendant Light Furniture $19,751

4 Pairs of Curtains $28,091

Pair of Guest Chairs $87,784

George IV Chair $18,468

6 Wall Sconces $2,741

Parchment Waste Can $1,405

Roman Shade Fabric $10,967

Roman Shades $7,315

Coffee Table $5,852

Commode on Legs $35,115…. Thain also paid his driver $230,000 for one years work, which included the driver’s $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay, documents show. Drivers of top executives are often paid about half that amount.

Adding a bit of gas to this fire, New York State Attorney General is reported to be investigating the early payment of Merrill bonuses.

In the larger context, what does this mean? It was reasonable to guess that Thain would not have survived long even without pulling a few fast ones on his pending employer. Bank of America still has a traditional banking culture, and that has not done well with higher pay, more flexibly run acquistions (for instance, BofA lost many wealth managers and important clients when it acquired private bank US Trust, and private banking is not a terribly free-wheeling business). That isn’t to defend Thain, merely to point out that even under less questionable circumstances, he might not have lasted very long.

But is this move a sign of a sea change in attitudes towards CEO and senior level prerogatives? Sadly, I doubt it. Yes, the worst excesses may be reined in, but so much unjustifiable behavior came to be seen as acceptable by boards (with compensation consultants providing a paper trail to boot) that it will take a long time to effect more fundamental change. Did anyone object to Sandy Weill putting working fireplaces into his offices (a vastly greater expense than Thain’s decorating?) Did GE shareholders know of all of Jack Welch’s perks until they came out in his divorce?

But the noise about Thain’s compensation is probably less important than how it unintentionally serves to divert attention from the real issue. Many (all?) of the big players in the financial sector are insolvent, period. Their credit losses (whether marked to market or a realistic cash flow basis) are bigger than their net worth. These firms are therefore wards of the state.

Yet we keep pretending that they are still private concerns, still keep the managements in place that created the mess, still allow them to pay themselves orders of magnitude more than average workers. As we have discussed, this is looting and the looting continues.

Why, for instance, has no one raised the issue of accounting fraud? Lehman’s financial statements gave no hint that it had a over $100 billion hole in its balance sheet. Yet no one seems interested in pursuing the fraud line of thinking (save some unhapy shareholders) and one wonders whether Lehman was alone.

Financial firms took on massive leverage and with it, huge risk, to boost profits and the pay of staff and senior officers. Even the financial press was reporting that credit spreads were far too narrow (ie, those taking risk were not getting enough income in relationship to the likelihood of losses). But those in the best position to understand those risks kept piling them on, because it was a “heads I win, tails you lose” bet.

And Thain got kudos for selling Merrill to BofA at what turns out to have been an inflated price. The fact that this characterization is widely accepted says the public has been played for fools. Merrll’s shareholders should have been wiped out, and its bondholders should have taken a hit. Instead, Thain transferred Merrill dud assets to the public and was (until today) applauded.