While the battle between Bank of America (BAC) CEO Ken Lewis and former Merrill Lynch CEO John Thain goes on over who knew about large bonuses and large losses and when they knew it, recent news that the bank will get $20 billion from the federal government along with $108 billion in loss guarantees has almost been forgotten. Much of the paper being supported by the government came from the Merrill acquisition.

The latest chapter in the blood sport between the two executives is a report that Bank of America was aware of $5.8 billion in bonuses going B of A and Merrill employees. Lewis had hinted that he was a bit in the dark about the arrangement.

The other important issue which has been raised is whether Merrill Lynch hid any of the problems on its balance sheet from B of A. According to Reuters, "New York Attorney General Andrew Cuomo is reportedly looking into whether federal bailout loans to BofA were used appropriately, and if shareholders of both companies were given all the necessary information about Merrill’s finances."

All of the battling between the heads of Merrill and B of A is bound to take the combined company’s eye off the ball of fixing the big bank. Even the board is bound to get tied up in the drama. So far it has supported Lewis. There is no way to know how long that will go on and who might replace him if he is forced to step down.

The federal government’s problem is that, if it does not want to see its capital put at more risk, it needs to encourage the resolution of the dispute. But, investigations take time. That means Lewis could be tied up in the imbroglio for months. There is no elegant solution to the problem.

For the time being, both Cuomo and federal authorities should pass the ball to the Bank of America (BAC) board. It has a duty to look into the Merrill merger and decide what should be done about any misconduct. It is not unusual for boards to hire outside counsel to look through complex matters involving potential executive malfeasance. During the options grant scandal two years ago, boards often took the lead getting to the bottom of these sorts of issues.

Having the several government authorities in the mix of parsing how the Merrill merger went down puts too many cooks in the kitchen. The B of A board was not paying attention to management when it invested in risky assets and lost billions of dollars. Perhaps its members can earn their fees now.

Douglas A. McIntyre

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