Jason Hartman is joined on this episode by Greg Farrell, author of Crash of the Titans: Greed, Hubris, The Fall of Merrill Lynch, and the Near Collapse of Bank of America, for a discussion of the economic crash and the resulting bailouts, as well as some of the inside dealings with some of the major banks, such as the buyouts by Bank of America. Greg explains how these banks that participated in the buyouts grossly underestimated the depth of problems in their own banks and in those they acquired. Listen at: www.JasonHartman.com. Greg relates his research on Merrill Lynch’s attempt in the 1980s to become more like Goldman Sachs and other Wall Street banks, which was to their detriment because they lacked the expertise for such business practices, and became involved in and in the middle of many of the scandals of the late ’80s and early ’90s. Like CitiGroup, they were in over their head. Jason and Greg discuss Wall Street in general and then specific financial groups regarding the recklessness and risky businesses, funds, etc, that they entertained to give the impression of higher rates of returns. As the plot unfolded, large bonuses to CEOs and high-producing brokers came into play, which encouraged an all or nothing attitude toward the company and fostered a “me” attitude versus long-term stability of the company. Greg also talks about what he calls the “Charlotte Mafia,” the clash of company cultures.

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. Greg 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.

Female Voice: Welcome to Creating Wealth with Jason Hartman. During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness then you ever thought possible. Jason is a genuine, self made multi-millionaire who not only talks the talk but walks the walk.

He’s been a successful investor for 20 years and currently owns properties in 11 States and 17 Cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman: Thank you for joining me today. This is you host Jason Hartman, on Episode Number 257 of the Creating Wealth Show. And boy, we’ve got a great show for you today. Don’t have time to talk to you for too long, myself, which you may consider a good thing, who knows. I hope I’m kidding when I say that, but you can decide.

Anyway hey, we’ve got Greg Ferrell today. He’s the author of a fantastic book called “Crash Of The Titans” and it’s all about really some interesting stuff, high level Wall Street stuff. You know, we try to kind of try to mix this up for you and make one episode practical, real estate advise type stuff and another one will be more on the big financial world, Federal Reserve Wall Street, whatever, economics, and kind of switch them back and forth. So, if you’ve noticed any kind of pattern in the last 256 episodes, that’s one that we very loosely try to follow for you. But yeah, this is a really interesting story. It’s all about — well, I’ll just read you the subtitle for the book, which by the way on Amazon.com got excellent reviews and it’s entitled “Crash of the Titans”, Greed Hubris and the Fall of Merrill Lynch and the near collapse of Bank of America and I know Bank of America’s the company that everybody in America practically loves to hate. So, you’ll like this story because you’re going to hear about a lot of the inside stuff. It’s pretty darn interesting. So, we will have Greg on in just a moment, but before we get to that, I want to thank Listener Brian Massy for posting this on my Facebook page today actually. He said, this will bring you some Monday morning cheer. And you know it does. It’s a Fox Business article. It says, U.S homeownership rates slides the 15 year low. And I tell you, I don’t know if there’s anybody else, other than myself in the real estate business who actually thinks, that’s a wonderful thing because most people in the real estate industry and I’ve been in it a long time, you know that, they want to talk about making homeownership rates higher and all the politicians want to talk about that too. But I actually think that some people just aren’t capable of owning a home and the rest of the people just really don’t want to own a house. You know, maybe they want to be mobile so they can move where jobs are or where life changers are, etc.

And so, the appropriate homeownership rate, I don’t know what it is, but I’ll just take a stab at it, personally, for America. I think the appropriate home ownership rate might be around, oh let’s say, 50 to 55 percent. Okay. So, what is it at now, you ask? Yes. Well, the article says, the share of privately owned U.S. homes fell to a 15 year low in the first quarter, Government data showed on Monday, suggesting that falling house prices are discouraging Americans from being homeowners. Well hurray, hurray for that. When the homeownership rate falls, that’s just more customers for us, us investors, us landlords, and remember, what’s the equation? Well, you know if you’ve been listening or have been to our Meet The Masters Events, out every one percent drop in homeownership rate equals approximately one million new renters. So, just huge, huge wonderful benefits for us as landlords.

It says, the homeownership rate slipped to 65.4 percent, the lowest level since the first quarter of 1997, the Commerce Department said. The rate was 66 percent in the fourth quarter. So wow, homeownership was lowest in the West, while higher rates were reported in the Mid-West and talks about how home prices dropped about 32 percent from their peak at the end of 2005, leaving millions of Americans with houses worth far less than their mortgages and pushing many into renting.

And another thing this article says that’s interesting here, it says the residential vacancy rate — and by the way, the statistics on this, I just have to tell you, are not very good. Why are they not very good? Well, they’re better for large institutional apartment buildings, but they’re not very good for single family homes, because where do you get the single family home vacancy rate from? Well, you know, there’s a few sources. I know that any of us as landlords, we’re not reporting that rate to any centralized data base, right. So, you could try and cobble it together from well, utility companies. Every 10 years you’ve got the census, that’s handy. That’s actually a pretty good one, but it’s only once a decade, right? So that doesn’t help. The Post Office. You know you can kind of try to cobble it together from the Post Office. The MLS Systems, which are totally disjointed and very hard to work with.

So, it’s pretty hard to get this data, but these are all estimates, anyway. It says it dropped 8.8 percent in the first three months of the year from 9.4 percent in the fourth quarter. It says, growing demand for rentals is boosting rents with the medium asking rent for an unoccupied property in the first quarter at $721.00 the highest since the first quarter of 2009. That compared with $712.00 in the fourth quarter. So, you see like I’ve been saying, income property is a multi-dimensional asset class. Rents are rising and this is just for so many reasons, such a wonderful time to be an income property investor, to be a landlord.

Phoenix, I’ve been talking about, my new home town, Phoenix, Arizona. Well, it’s not quite a year so I’m calling it new still. So, I’ve been talking about how prices have been going up here, how this has becoming a very difficult market in which to do business. I’ve been talking — and you know, what you’re seeing in Phoenix is just really the flag ship for what you’re seeing in all of our markets. It’s happening in all of the markets in which we do business, we’re seeing the same trends. We’re seeing reduced inventory, we’re seeing the quality of inventory go down. We’re seeing where we have to adjust our expectations because the deals just ain’t as good as they used to be, folks. They’re better than they were many years ago, but they’re not as good as they were a year or two ago, that’s for sure.

So, this article when I touched on the pretty much the same story last week, this is a different article, so you know they kind of — not last week but last episode, so they say it differently right, but it says home prices in Phoenix area up 20 percent in the past 12 months. Home prices are surging in metro Phoenix climbing eight percent in March, alone and 20 percent in the last 12 months. The medium price of a house in this region climbed up to $134,900 according to report by W. P. Carey School of Business as A.S.U, Arizona State University.

The trend is projected to continue throughout the year, although at a slower pace. Now Mike Orr who I really need to get on the show, I’ve been thinking about that, he says that Metro Phoenix Housing Appreciation rate for 2012 for this year will reach 25 percent by September. So, if it continues after September for another three months, finishing out the year, what are we going to hit 30 percent appreciation or regression to replacement cost as it were in Phoenix? Maybe. It says, fewer foreclosures mean fewer inexpensive homes for buyers. The number of homes taken back by lenders in Metro Phoenix is down 60 percent from March 2011. So foreclosure’s down 60 percent in a year and it also says that frustrated real estate agents has buyers ready to sign contracts, but can’t find houses for them. So, this is true of all the markets we’re doing business in more so in Phoenix. Phoenix is sort of a flagship market. So, it’s not true of those markets but it is of Phoenix.

Okay. Last thing before we get to our guest, well you probably know what one of them is, meet me in St. Louis in just a couple of weeks. Okay, I want you to there on March 18th through the 21st so you can join us for the Creating Wealth for Today’s Economy Boot Camp. A whole bunch of you have registered so far. We want to have more people there. This is the furtherer away even we’ve ever done. We’re usually on the Western side of the Country. So, meet us in St. Louis. Creating Wealth Boot Camp, property tout of St. Louis and a bonus property tour of St. Robert.

And by the way, those of you who have registered, please touch base with your investment counselor at my company and let them know if you’ll be joining us for the St. Robert tour as well, on the following Monday, because we need to get sort of a head count for that and see how many people are going to that one.

Okay so, be there, register JasonHartman.com. Now, I got a question, a good one by the way. This really tied in with our last episode as we talked self directed 401Ks ad self directed IRAs or I really should have said solo 401ks and the great opportunities there with self direction so you can be in control of your investment portfolio so you’re not leaving your financial future to somebody else who does not have your best interest at heart.

So, listener Henry emailed one of our investment counselors, actually a little while ago about this, and it’s a great question. So Henry, thank you so much for asking. He says, long time listener to the Creating Wealth Podcast and a possible investor at some point in the future. Thanks for all of the info you put out there. Sometime recently I believe you said you were going to do a podcast on self directed IRAs. If you do, may I suggest that your address how to handle RMDs Required Minimum Distributions. That’s what that mean, RMDs, okay.

I’ve heard folks talk about self directed IRAs, but no one seems to address how RMDs are handled with mutual funds. It’s easy. You sell however many shares you need in order to satisfy the IRS Regulations. However, if your IRA holds property, it’s not like you can just sell “part” of the property. At best, I can assume you’d have to sell the property and take some of the proceeds to satisfy the RMD for that year. The issue of course, is that it may or may not be a good time to sell. Thanks again for all the work you do, Henry.

Henry, that is a fantastic question and folks, what Henry’s getting out there and I have no idea how old Henry is, but if you are 59 1/2, you can start taking distributions from your retirement plan, right? We — most of us know this, but the other question is, when are you required by the IRS to take distributions from that plan and I’m pretty sure that is 70 1/2 years old. So, whey you’re 70 1/2 and you are required to start taking distributions out of you plan, if you have property in your plan, the property is not very divisible, is it? So guess what, that is such a great question and really nobody has ever asked me that question.

So I went to Bryan who we had on the last how, and I asked him that question. I said, you know this is a great question. What do you do? Here’s what you do. You actually deed — if you have to take, for example, if you have to take — if the property value is $100,000 and you want to take a distribution of say $10,000, you literally just deed 10 percent of that property to yourself personally, and the other 90 percent of the property stays in the plan. And then if the rent is $1,000 per month, $900 of that rent goes to your plan and $100.00 goes to you personally because you own 10 percent of the property.

Then the following year, you just take another 10 percent and you keep doing that and that’s how you take your required minimum distributions and it’s actually quite easy to do that. It is not a complicated thing to just simply do a little de-transaction with your plan and yourself.

For more information, you can contact your tax advisor or you can contact Bryan who we had on the last episode about that episode number 256. So with that, that’s a great question. That’s a great question. Thank you and listeners please put in your questions. You can put them at JasonHartman.com, on our Facebook page, whatever. We’ll try to address those for you either directly, with my [inaudible], my counselor or here on the show.

Let’s to our guest today, and let’s talk to Greg Ferrell about Crash of the Titans. We’ll be back with that in jut a moment.

Jason Hartman: Are you aware that the largest transfer of health in human history is under way? Are you concerned about protecting your income, savings or home equity? All these bailouts benefit the Wall Street crooks and the Washington elites while costing the middle class. Experts are predicting difficult times ahead. The only question is, where will you and your family end up, with the haves or the have nots.

My name is Jason Hartman with Platinum Properties Investor Network. For two decades I’ve made a small fortune in the most historically proven wealth grader. Don’t be the victim of Wall Street fat cats who line their pockets with your pension funds. We can teach you how to protect yourself and your family in these wildly turbulent financial times. Create and protect your next egg the same way 85 percent of America’s wealthy do. If you’re interested in the most innovative financial education around, it’s urgent that you register for our next event. Learn more about this outstanding event and get you free CD at JasonHartman.com, that’s JasonHartman.com, or call 1-800-40Jason, that’s 1-800-405-2766. Your investments could be gone tomorrow. Protect yourself and act today.

Jason Hartman: My pleasure to welcome Greg Ferrell to the show. He’s the author of Crash of the Titans, not clash of the titans, Crash of the Titans, Greed Hubris the Fall of Merrill Lynch and the near collapse of Bank of America, and you’re going to learn some interesting stuff from kind of a fly on the wall prospective about what happened here a couple of years ago. And Greg, welcome. It’s great to have you on the show.

Greg Ferrell: Hi Jason. Thanks so much for having me.

Jason Hartman: My pleasure. Well you are a correspondent with Blumberg News, so you’ve certainly got the inside track on things. When I heard — I remember it was over a weekend right in the midst of the financial crisis and it was like on a Monday morning or I think a Sunday even —

Greg Ferrell: Late Sunday night when these deals were hatched.

Jason Hartman: Yeah.

Greg Ferrell: But that’s right and now it’s Monday morning.

Jason Hartman: Right. That I heard B of A bought Merrill Lynch and shortly before that they purchased Countrywide or I guess they just took over Countrywide and I thought, man B of A is in trouble. They bought two losers and what happened? What was sort of the inside dealings here that were going on, and this was during bail out mania and so forth. Tell us more.

Greg Ferrell: Okay. Well, thanks for setting the stage on that and thanks also for bringing up Countrywide. Let’s talk about that. You had — I think the key element here and one of the reasons of their initial crisis of 2008, you know hit so predicatively at such a harsh — it had such harsh consequences is that a lot of the people, the to bankers in the Country on Wall Street and elsewhere, and at the top of Bank of America misjudged really underestimated the depths of the problems they were facing. And when you look at Bank of America, that is a pivotal moment in the history of that bank. Bank of America had been taking a couple of decades for this band of aggressive ambitious bankers in Charlotte North Carolina to build and construct the largest retail bank in the Country, and they had aspirations to move into Wall Street in a big way, as well.

However, what they lost, the CEO of Bank of America at the time, Ken Lewis I don’t think had a full grasp of the seriousness of the issues his bank was facing. So, when he bought Countrywide, it fit in with the long term, multi-decade strategy of the Charlotte Bank of — whenever you see an asset and where you can expand in a new area of business, it’s worth buying, and even if it seems that you’re overpaying now, in time it will look smart. That had been true for more than 20 — 25 years. It stopped being true in 2008. So, the two purchases that were made in August, is when the Countrywide deal closed and the deal in September to acquire Merrill Lynch in an off stock transaction that was valued at 50 billion dollars. I think Ken Lewis was confident that over time, these would be great deals.

He wasn’t aware if you follow Bank of America’s internal announcements, it wasn’t until October, a few weeks after that, that I think when he looked at his own bank’s three quarter earnings, he realized that the credit crisis was hitting the consumer as well, and this was going to be a particularly bad period. And then he went to the markets to try to raise capital and of course the book details differs frenzied activity at Merrill Lynch and Bank of America in the fourth quarter of 2008 and how at a certain point, Bank of America tried to get out of this deal only to be virtually forced to by the then Treasury Secretary, Hank Paulson.

Jason Hartman: Hank Paulson forced him to it, yeah. And so at the time — then you’re saying they — they overpaid for both of these companies, right?

Greg Ferrell: Yeah so but here’s the real difference and in the long term, I think Ken Lewis will be — Ken Lewis of Bank of America is a complex thing, but I think in the long term, despite having overpaid for Merrill Lynch, who is an excellent acquisition for Bank of America for the following reason. First of all, America was all stock transaction, so they didn’t really have to pony up the cash. Secondly, it gave Bank of America an excellent asset and the best or best known franchise in terms of the financial advisory business. I guess I would look at it this way in terms of a simple metaphor, Ken Lewis for him seemed like a fantastic car, automobile, and agreed to pay top dollar for it. It wasn’t really worth the top dollar that he agreed to pay, but it’s a vehicle that runs really well and it helped the Bank in the last few years. In fact the earnings from the Merrill Lynch portion of the business carried Bank of America in 2009 and much of 2010.

In contrast, Countrywide has been an unmitigated disaster. Countrywide cost only a couple of billion dollars, but the folks at Countrywide should have paid Bank of America to take it over.

Jason Hartman: Right.

Greg Ferrell: It cost the bank shareholders tens of billions of dollars, I think in the area of 40 billion dollars in losses associated with countrywide acquisitions. So it’s a terrible, horrible deal. A spectacular misjudgment of the underlying problems in the mortgage business in the U.S. at that time.

Jason Hartman: No question. You know, when we talk about these three companies, I mean the criminality or the complete neglect, whichever — or the complete stupidity — I’d say it’s criminality, but everybody’s entitled to their own opinion, it took place in all of these companies, is amazing. I mean, think of it. Let’s start with Merrill Lynch. I mean, I’m sure it was happening long before I knew anything about it or became aware of this but back to the Orange County Bankruptcy, because I’m from Orange County California, in 1994 I think it was, Merrill Lynch was at the center of that scandal. They were at the center of the conflict of interest with investment bank, doing investment pumping stock —

Greg Ferrell: The research, yes.

Jason Hartman: — pumping stock, you know to clients —

Greg Ferrell: For [inaudible] stock, yes.

Jason Hartman: — and the research was not impartial at all, it was a total conflict of interest. I mean, it’s like countless scandals with Merrill Lynch. And then we’ll talk about Countrywide and Anthony Mozilo and how he got his get out jail free pass, and then we can go into B of A and how their CEO got a big raise just recently for six times the prior years package, I guess and the shareholders lost. They have their value but where do you start with these guys?

Greg Farrell: Yes, where do you start? Well, a couple of things. One is in order — in my book, it’s focused primarily on the Bank of America, Merrill Lynch deal and the fourth quarter of 2008. However in order to set the stage, I had to do a lot of research on Merrill Lynch, the history of Merrill Lynch and how Merrill Lynch got to the point where it had once been the safest, soundest franchise on Wall Street, but where they basically boost themselves up In your reference to Orange County, the reference to the research scandal, these all grew out of Merrill Lynch’s attempts to become more like Goldman Sachs, become a bigger player in the investment banking side of Wall Street, because Charlie Merrill who created what is known as Merrill Lynch and the thundering heard of financial advisors, that was a fantastic grown business. Not huge growth but very solid grown through the second half of the 20th Century and it helped reintroduce a lot of Americans who’d been burned in the Great Depression back to the upside of Wall Street in investing for long term.

By the end of the — by the 1990s, the ’80s and ’90s, Merrill Lynch’s leaders had aspirations to become much more like the other Wall Street banks and getting into much riskier businesses, and this was just not their sweet spot. So you have what is, in the case of Merrill Lynch, this huge organization that wants to be in the middle of everything without the expertise that you had in some of their competitors on Wall Street, notably Goldman Sachs and therefore they wind up in a lot of the scandals on closings that occurred in the ’80s and ’90s. It’s sort of that they’re big enough that they ended up getting touched by a lot of these things or lining up in the middle of it.

Jason Hartman: But not all [inaudible] to be. They were really out of their league, so to speak definitely when it came to getting into the complex structured products, fixed income collateral debt obligations.

Greg Ferrell: You know, they like CitiGroup, got in over their heads. They thought well, this is easy money to make and instead of focusing on how they can get burned, and being very careful about their exposure they actually got sucked right in. It was easy money. They wanted to increase their earnings every year and they just doubled down, and for a few years things can seem to grow really well until they didn’t, and when they didn’t, they got burnt very, very badly on that and therefore ended up losing their own tenants.

Jason Hartman: What year did it really all change? I mean, I think in general — Wall Street in general — maybe we’ll talk about that and then we’ll talk about Merrill specifically, but it seems that Wall Street in general, and again I’m glad to say I’m too young to know all this, but from my readings and research and the guests I’ve had on the show, it seems like Wall Street really had a big significant change in the ’80s, where it went from the concept of telling its clients to buy stocks that pay dividends to where it became a speculative frenzy to where the financial services firms starting going public and when they were public, they had different pressure. They started acting differently. There was a real C change on Wall Street at one point, wasn’t there?

Greg Ferrell: Yes, you’re absolutely right. If you get up to the 50,000 foot level and want to look back over the decades, the 1980s were a big inflection point on Wall Street and for a number of reasons. One is computerization. So trades, etc., can be done much more efficiently as the company I work for now, Blumberg played a large role on that by basically bringing real time bond prices into — almost to the area where real time equity stock prices were, which had basically revered up the business of bond trades and gave buyers and sellers more confidence of bonds, institutional buyers and sellers that they were getting a good price, but this all fits under the roof where computerization and investments and technology. So, you’ve got to ask the facility — the ability to trade much more quickly and much more accurately.

You have also the profusion of mutual funds and a whole generation of baby boomers now, who are starting to approach retirement age with money to invest. So you have this huge influx of money that’s going to come in looking for places to invest a larger group of characters on Wall Street who are more than happy to invest that stuff and look for more exotic higher return products in which to invest and lay it on top of that at which I think it’s overlooked. It’s a transformation of compensation practices on Wall Street and then beyond. This is recently in where the bonus call jerk really too hold. I think there’s always been — you know it’s always called term Wall Street, but with the — there was a change in the Federal Law in the — in actually the early ’90s where any compensation over one million dollars in cash, that’s we’ve owed one million dollars. Congress decided in its wisdom would be taxed at a normal rate rather than the way its been a lack of taxes up until one million dollars.

So, the idea — Congresses idea mentioned [inaudible] I think when this was passed and Bill Clinton signed it, was to basically limit fee or compensation, which at the time people thought was out of control. Lie Detroit auto makers were making lots of money, whereas the products they’re producing weren’t selling and the Japanese auto makers were selling — not being paid nearly as much, only a fraction of that, but they’re producing much better cars.

Now, any well intention law, I had a negative affect.

Jason Hartman: I’m not sure I’m clear on the compensation issue. I just want to make sure the listeners understand that. Are you saying that the base compensation, being under or over one million dollars was the thing Congress was attacking but what they do get around it has just created these huge bonuses, because most of these CEOs are paid based on the bonus culture, as you say.

Greg Ferrell: Yes, exactly. So one of my serge is going back so far in history, ut basically it’s an obscure war, but what it did was by penalizing any cash salary over one million dollars, what you did was drive — okay, well they weren’t paid a lot. There was going to be no tax penalty on incentive compensation. So, we’re getting around at the limit where the [inaudible] that you self sustained if you paid a CEO of a couple of more than a million dollars to put a significant amount of his or her package, mostly his in of courts an IE bonus. And on Wall Street this became ramped in massive bonuses so that bonuses for traders for may years in the past decade, traders were the best paid guys on Wall Street, better than the CEO.

The top earners at Goldman Sachs or Bear Sterns or any of the big trading firms Lehman Brothers, were the traders. They were making tens of millions getting bonuses in excess of tens of millions of dollars a year. When you put that kind of money in front of someone, and the same with the CEOs, it really encourages an all or nothing bet on the company because if you win, you get 50 or 100 million dollars. If you lose, someone else loses. You still get your 50 or 100 million from last year. Do you know what I mean? It doesn’t — they don’t suck it out of you. So, [inaudible].

Jason Hartman: In the bonus culture it encouraged the short term minded risk.

Greg Ferrell: I’m not saying it’s —

Jason Hartman: It’s all about my tenure. It’s about the next quarter or the next year verses the overall strength and welfare of the company and its shareholders.

Greg Ferrell: Exactly. This is not about long term investment health of the company. This is about a short term investment to help me from my bonus at the end of this fiscal year. That’s what by 2008 — 2007. That’s and by bringing this up I think you’ve hit on the point. That’s what Wall Street had walked into and still largely is but it hit its high point or low point, if you will. I remember clearly in the fourth quarter of 2006 that was a record setting year for all bonuses all across Wall Street. Every — all five of the major Wall Street banks reported record earnings. That’s against the course of gravity. You can’t have all of them having great years at once and it was in raw feasting on this combination only, including a bubbly real estate market that was just then peaking and their bonuses tied to selling exotic products with no long term upside, only short term up side.

Jason Hartman: Yeah yeah, it’s really to bad. You look at people like John Thain who was head of Merrill Lynch at the time of the sellout to be of A, and he spent over a million dollars decorating his personal office. He — I think his take from the company — from the losing company, okay, was over 70 million dollars in the course of a year or something. It was just ridiculous.

Greg Ferrell: Okay, let me address that, because that’s an important part in the book, as well, the incentive part and Thain to be quick did not get that part or anything newer that. He signed when Stan O’Neill was pushed out of Merrill Lynch at the end of 2007 for creating this massive exposure and not telling his board how bad things were. John Thain was brought in. He had been a top executive of Goldman Sachs where he made well over 100 million dollars when Goldman Sachs went public. He had been CEO of the New York Stock Exchange and help successfully bring that public and made a good amount of money there. He came in and had an agreement and I think he was another blue sky like most of his colleagues on Wall Street, figuring things would be a short dip, things would get a lot better in 2008 and his package was such that yes, Merrill Stock bounced back to where it had been before. Yes, he would get in the area of 70 million dollars.

Fast forward nine months, things turned out to be much worse than he thinks and Bank of America has to offer — this actually helped Merrill Lynch share holders. He had no — there was no bonus for him to sell the company. He never envisions that he would fail to save Merrill Lynch and as a result, he was going to get nothing because his stock options were going to be under water outside of his base salary, which in itself was pretty good, but he wouldn’t near the 70 million dollars. And as a result, yes he’s on the losing end of this. He strikes an agreement to sell to the Bank of America and then he spent the next few months trying to negotiate a bonus from Merrill Lynch as much 40 million dollars in a losing year, when the company was on its way to losing $28 billion dollars.

Eventually the Merrill Lynch ward stood up to him and realized it would be politically impossible for them to be awarded any kind lf bonus to paying for that, but you should know the same did not get a massive bonus out of Merrill Lynch. He ended up a lot of America Stock bit he did not get a bi bonus for that. He wanted one.

Anyway, I go into great detail on that in the book..

Jason Hartman: Right, right. What’s he doing now just out of curiosity?

Greg Ferrell: He heads up a middle market finance company, CIT and I think he’s ding a great job at it. CIT Financial, which also ran into problem in the financial crisis, tears to — they hit a sweet spot in terms to small and medium sized business, that the big banks overlook. So, it’s several low runs down from what he was doing as a top executive at Goldman Sachs and as CEO as Merrill Lynch, but he’s still in the financial services business and doing a god job there.

James Hartman: So, you’re not very critical to Thain then. So many people are. You held a chapter called —

Greg Ferrell: You’re right. I’m not very critical of him because he didn’t cause it. His biggest — from — he — Stan O’Neill who’s predecessor of Merrill Lynch is the guy who blew Merrill Lynch up and Stan O’Neill walked away with 10 million dollars.

Jason Hartman: Fair enough, fair enough. That’s where the real — we said, something’s wrong with this picture, occur it, which was prior to paying the rival. {Inaudible] to save it and yes, he spent a million bucks that poorly advised you thinking that the economy was going to come back on rehabbing his office, but that’s no crime compare to what went before, if you know what I mean.

Jason Hartman: Fair enough, fair enough. No, I agree with you. I know that all the reasons for failure were set in motion before John Thain came aboard. I’m only critical of how much money he made as the company was going down, which you mentioned the bonus culture a few minutes ago. I’m a capitalist. Look, I don’t bonuses at all. I hope these guys make fortunes. It’s just as long as it’s commensurate with the shareholders and what they were — and they’re not really just the shareholders but the stockholders where they’re not burning the government though this bail out money or the vendors of the company by — a lot of these companies, they leave so much devastation in their wake. Their vendors go under. They’re just — their vendors are in bankruptcy because of what these companies do to them sometimes. You know, they’re jus such big octopuses. You know —

Greg Ferrell: Yes, absolutely. So one of my favorite parts of the book, I’ve benefited from the fact that there are so many investigations but the New York State Attorney General and Congress into this whole deal that I got all sorts of great stuff from depositions, board members, etc. One of them is this. There’s a scene that takes place the first quarter 2008, after Thain has agreed to sell Merrill Lynch for a very good price to Bank of America, but he’s going to know under the CEO and his new colleague, not the CEO Bank of America, but the head of HR from the Bank of America. They can’t do this on an accent properly but he comes to New York to visit with Thain. They talk about what bonuses are they going to take to your subordinate to make sure they’re happy and stay on board, because that’s what we’re buying the people and he said this will get asked why and this fellow whose s southerner turns defensive. Well what about you, what are you going to get? And Thain says I’m expected to get 40 million dollars and this guy from Charlotte North Carolina since you know that’s from one from the — if you really want to go far in our organization, that’s really not going to go down well at all, because at Bank of America we pay — we don’t pay for the deal. We pay when the deal pays off for shareholders, and it’s like a — you know a lot of the guys and Wall Street will look down on the supposed southern hicks in Charlotte but those guys have absolutely right you know that Wall Street had gotten totally out of whack in terms of bonuses.

Now, don’t get me wrong, the folks from Charlotte will pay very well but at Charlotte levels. They were not paid in astronomical Wall Street levels. They were allergic to that and they cut back on a lot of bonuses, and of courts they had to because they had to accept money from the Government, 45 billion dollars in [inaudible] fund so that constrained their payment levels. But one of the biggest elements of the cultural clash between Bank of America and North Carolina and Merrill Lynch on Wall Street was — what — whose idea of what a good bonus was and the folks at Merrill Lynch — he was just staggeringly off the charts. The idea that you could think in that environment that you’d be worth a 40 million bonus was just totally off the planet earth.

Jason Hartman: Well, and I agree with him. I mean is that what you are calling the Charlotte Mafia?

Greg Ferrell: Yes — well yes, and this guy he had [inaudible] was an interesting character. If he basically made a lot of — he was Ken Lewis, the CEO’s right hand man and it was his job to help make these deals work, to get everybody together, decide who’s going to run which division, etc., but he’s one of those guys who if you’re on Wall Street, a lot of Merrill Lynch guys who have charcoaled him behind his back, because they thought he was a southern hick. You know, I’m not phrasing this property but they — you know not at their level, but he absolutely articulated the right to you know — he was absolutely right about this that it should be about the shareholders — when the deal pays of for the shareholders that’s when you get your money, not less, not the Wall Street Investment banking model which is as soon as the deal signs, you get a check. No, it should pay off — it should make sense for the long term for the company before anybody gets rewarded. That was the real clash of cultures that’s between the two organizations.

Jason Hartman: Yeah, Wall Street just thinks that you get your bonus no matter what. Regardless of whatever —

Gregg Ferrell: We get the deal. It doesn’t matter if the deal’s good. We get the deal, I want my money now.

Jason Hartman: Yeah, unbelievable greed, it’s just disgusting. So — okay so we’ve talked a lot about Merrill. Maybe just a touch on Countrywide. It’s kind of old news by now but I mean Anthony Mizolo —

Greg Ferrell: Angelo — Angelo Mazilo.

Jason Hartman: I’m sorry, Angelo Mazilo.

Greg Ferrell: That’s all right.

Jason Hartman: And the junk loans they were making. I mean just unbelievable. He pays a token fine which to nobody else it’s not token to anybody else but to him it’ toakened. And do you know why, at 6 million fine is in fact a token fine to him because most of it is paid for from Bank America because the director’s and officer’s insurance he was indemnified and as a result —

Jason Hartman: Do you know where —

Greg Ferrell: They find it what’s staggering to you and me most of you listeners. It doesn’t hurt that much because of the money he to out and how much of his fine was paid for by other people, so Mazilo when you talk about there’s been a lot of criticism of the Justice Department for not being more aggressive while going after the supposed malfactors on Wall Street, one that is very difficult to build these cases an the one case that the Fed did try to brain just a couple of Bear Stern’s salesmen just a couple of years ago, blew up when lawyers did a very good job, I think when confusing a jury as the guys would put it. And so they ultimately [inaudible] the FCC in a simple case.

In the case of Anthony Mazilo, he was being investigated by the Justice — eventually he was invested and settled with the FCC in a civil case. His lawyers I think were very good because they were — he sold a lot of stock through an automatic — he altered it a number of times, but through an automated stock plan through the run up through the crash. The fact that no prosecution brought to him meant A, the prosecution didn’t see that there’s a strong case against him or convinced by his lawyers that there wasn’t, but for a lot of people that weren’t very close to it, it looked that would have been a guy that somebody would have gone after. Do you know what I mean?

Jason Hartman: Let me take a brief pause. We’ll be back in just a minute.

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Jason Hartman: So now moving forward to B of A which is a conglomeration of the three companies, B of A is arguably the most hated company in America. Maybe outside of AT&T when your IPhone drops a call, but is that a fair — is it fair or is B of A just they kind of made two bad deals, two huge bad deals or is it fair to hate B of A? Tough question.

Greg Ferrell: First of all I think one bad deal, Countrywide. The other deal ended up putting in the newspaper in the wrong way for an entire year —

Jason Hartman: And in the wrong time, the time was really bad.

Greg Ferrell: — in the wrong time, but it wasn’t like that. Frankly, what I think has generated the antagonism towards Bank of America is not a — it’s the Countrywide deal in trying to collect. It’s not the Merrill Lynch deal, aspect to the Countrywide deal where the foreclosures and the way they handle the foreclosures has been terrible. The robo signing scandal debt collection also they’ve been such a large retail bank, a lot of people who interact with them feel they’ve getting gauged or nickel or dimmed or a fee for this or a fee for that. That’s what generates a lot of antipathy towards it. It’s not like oh, they bought Merrill Lynch therefore I hate them, just the opposite. I think it’s — you know how come every time I go to write a check or every time I — they ding me for this fee or they ding m for that fee? And I think it’s what they took it from, most of the biggest banks do this. They’re the biggest, or at least the biggest retail banks, so they end up with the lion’s snare of the ill will, if you will.

Having said that thy haven’t helped themselves, it’s been a couple of public relations snafus are misfired the way they rolled some of these fees or minced them and they’re the most frequently targeted by these UTube videos when someone is either getting foreclosed on their house wrongly, or some other improper fines that are being imposed by the bank. There have been several instances of UTube videos going viral, taxed from Bank of America for doing that. All this is contributed to the sense that Bank of America is being hated.

I mean Goldman Sachs has very friends as well, but it’s not as widely disliked, because it’s not exact —

Jason Hartman: It’s not as public.

Greg Ferrell: — it’s largely institutionalize. Right, exactly. You and I, for the most part, most Americans don’t interact with Goldman Sachs t our local bank. Always do practically with Bank of America. You know it’s on every street corner in the Country. So, that has contributed the level of dissatisfaction and low opinion of the bank.

Jason Hartman: But I think also with B of A is that you have like this massive level of the incompetence and bad company service. Now granted, they took over Countrywide, you know a huge, huge low and portfolio, but these banks, and it’s not just B of A, but of course like you say, they’re the biggest so they suffer the most at will. They take the bail out money. They say okay look, we’re going to use this, we’re going to loan to small business, we’re going to help the stressed homeowners, we’re going to do loan modifications, you know, we’re going to do short sales and just try getting a loan mod from B of A. I mean, just try it. I own a real estate investment company and I hear the stories constantly and it seems like what they really did it, almost like — I hate to fold it like a conspiracy theory here, but it seems like they basically said, look we’ll set up these departments to do this. They’ve got the call centers in India. They’re granted, they’ve moved a lot of that or maybe all of it back to U.S. now, thank God, but you can’t get anywhere. I mean it’s just unbelievable the dozens and dozens of hours people have wasted talking to Indian call centers in B of A that are these do nothing outfits that are like window dressing to get Government assistance, if you ask me.

I mean that is kind of like on a different side of it that you may be familiar with, I sure am because I hear it from our clients.

Greg Ferrell: Yes, when you’re a business, you have more storage. I don’t but I’ve heard and read and it anecdotally about a lot of those issues that do tend to be more with B of A than their competitor banks. I can give you any good specific insight on that. I can’t say that with their 300,000 employees it’s — it’s a real — it’s like turning an ocean liner around in the middle trying to get everybody — they clearly have had real challenges in folding — because Bank of America used to be known for very good service. I just think in some ways it’s gotten so big that that’s a big monster of a job and obviously they’re not dong it very well o getting everybody to row in the same direction or issuing an order eating from Charlotte but it’s not being carried out or being carried out poorly. And that’s trying to be charitable to them assuming that they are trying to carry it out properly.

So like I said, I don’t have any good inside at the retail level as to why that is, but I’ve heard the same stories you have.

Jason Hartman: Just to — before you go, a couple of chapter titles in your book, “Crash of the Titans” and I wanted to ask you about. Project Panther, what is Project Panther?

Greg Ferrell: Oh, actually it’s a relatively small episode in the grand scheme of things but as I mentioned at the beginning of this conversation, in September of 2008 having just bought Countrywide, Bank of America decided to buy Merrill Lynch for 50 billion dollars and thinking that the economy the worse is over, things will get better soon, a few weeks later in early October, the earnings for third quarter come in and now they’re much worse then he thought. So, he realized its tie to raise some capital so he cashed — he delegated — he got one of his own investment bank of New York to put together a fund raising project to go raise some money for Bank of America., and this guy — because everybody in Charlotte North Carolina loved their football team, the Panthers who were playing that Sunday came up with basically Project Panther was the plan to raise capital.

I focus on it in the book because the folks in Merrill Lynch who supposed to have real expertise in raising capital, John Thain and Company got involved in this and didn’t really contribute much. And it was an early sign that this marriage was not going to necessarily work out that well where the help from John Thaana and some of the folks from Merrill Lynch didn’t really improve the capital raising initiative that Bank of America’s buying an investment bank so they can, among other things, help raise capital for the company and the first [inaudible]. I wouldn’t necessarily say it’s a dismal failure but doesn’t come off extremely well.

Jason Hartman: Um hmm. Sure, sure. Who’s the Boston Mafia?

Greg Ferrell: The Boston Mafia, they’re I guess the people in charge [inaudible]. Bryan Moynihan and a bunch of other executives and Board members who came to Bank of America, came to [inaudible] as part of the acquisition of Fleet Financial in 2004. So, this is actually interesting. The real PNA of the Charlotte Bank and before it was Bank of America it was Nation’s Bank they acquired San Francisco Bank of America and took the better known name, but it was a Charlotte Bank and they kept tight control through local board members and executives who come up through the organization. And it was an excellent organization, but one of the reasons they got so good was by acquiring other banks that Ken Lewis acquired a large bank of the [inaudible] Fleet Financial in 2004. [Inaudible] most of the top ones washed out but a few survive Brian Moynihan and the team around him. And basically the team of that chapter, the final chapter is how Ken Lewis was essentially pushed out or ousted out of his job for all the money that he needed to close Merrill Lynch and all the governmental inquiries into this, it because the target of so much media attention that was not healthy for the bank. There was a real scrum to see who could replace him for the plum jobs I understand. It seemed in banking in U.S. was a middle aged fellow who was a deal guy and the other was Brian Moynihan of Fleet Financial, and Moynihan and his team, I think, did a very good job in maneuvering — putting in position for that job and he was eventually elected to replace Ken Lewis. So, the first time in the history of the Charlotte Bank and what you refer to as an outsider running the bank and only as so far as the bank for five years as opposed to 15 or 20 years. He’s not a career guy with the Charlotte bank.

So, that’s a shot hand version of what the Boston Mafia stands for and they still have a couple of board seats are still there. You have much less of a presence of the board members — a lot of the board members who came from the Southeastern U.S. who were brought in for geographical ties for that region were pushed out in 2009 and were replaced with other folks with banking expertise, but a core of the Boston Directors, if you will, are still in place.

Jason Hartman: Yeah, and with AP news release, March 28th so recent I got to just share it, Bank of America gave its CEO a pay package worth 7.5 million dollars last year which is six times larger than 2010 and the raise came while the company’s stock lost half of its value and the bank lost its claim to the biggest in the Country. It’s no longer the biggest in the Country, at least as a retail bank, I guess. Maybe City now has that spot. I’m not sure, but it’s really amazing. I mean, what does the future look like for B of A with these two companies that it absorbed and all of its challenges?

Greg Ferrell: I think the future Bank of America is closely — is very closely correlated to the future of the U.S. economy. The Bank — the acquisition of Merrill Lynch and the acquisition of Countrywide is a double down bash on the U.S. economy. So, as the U.S. economy goes, I think Bank of America will go and so new we get into what your view of our 2.5 percent GDP growth per year will it continue? Will it grow more? If it does, Bank of America will grow with it. They’re very heavily exposed here. I think the bank has suffered because the U.S. economy has in the last couple of years, as well. So, there are lot things the CEO money can and can’t do, but it can do and it sold off assets etc., which contributed to making it smaller. There is lot of things he can’t do that is just beyond his power. The economy is what it ism if you will.

Jason Hartman: There are much bigger forces, no question about it.

Greg Ferrell: Yeah, exactly. And some of them you can get up and others you just have to take your medicine and they’ve been you know, ingesting medicine from Countrywide now for three, four years and it’s been painful. I think the future when they get Countrywide behind them and when — if and when —

Jason Hartman: They get the work out — right.

Greg Ferrell: You get the work one and real estate gets coming back a bit in a meaningful way then you know —

Jason Hartman: It will relieve the light of the pressure, sure, no question. You know, I’ve got to ask you just in closing break, what is your opinion of the future of the stock mark and the U.S. — the broader economy in general? You know, when you mention 2.4 percent growth, that’ obviously unemployment I much higher than the Government tells us it is. We’ve got massive debt. Obama is the drunken sailor of spenders of all time and I mean inflation it’s like it’s coming to mean —

Greg Ferrell: its predecessor is good at spending as well.

Jason Hartman: Well, I agree — listen I agree —

Greg Ferrell: [inaudible}.

Jason Hartman: — but Obama’s worse, that’s all I’m saying.

Greg Ferrell: Yes, you are.

Jason Hartman: Yeah, but it seems like we’ve got inflation coming our way in pretty significant doses. What’s your outlook of things?

Greg Farrell: Boy, this is way beyond my grade.

Jason Hartman: Yeah, just a quick question. Yeah, just a quick question.

Greg Ferrell: I think I’m you know, because I read about companies. I studied what happened to companies. I’m not a good macro economists but writing about these folks on Wall Street who are convinced that the early months of 2008 that the financial crisis was actually we were in the 7th inning or the 8th inning and things would get better soon, and these guys are at the top of their scheme and should know better. They were way wrong. So this is obviously — you know in the real estate business, we’ve all grown up with up until three years ago this premises that — yes, there are dips but things always bounce back and yeah, the people who invest during the dips who end up doing their best and what’s been really shaking in terms of confidence the last three years has been sort of — yeah, they said it’s going to bounce back and it’s not longer there. It’s no longer a given. It’s you know, we’re still in the second inning, are we in the fifth inning of the rebound of the recovery. We really are incognito in terms of our life times. You have to go back to almost a century to a point in time where things drifted in such a strange way and yes, unemployment — the number keeps looking better each month, but yes, it’s to be far worse than the actual number being put out by the Government, so much that it doesn’t get measured, you know people just give up looking for it.

So yeah, I guess the problems in Europe are — no one should take any joy in what’s happening in Europe, except it makes this economy seem healthier, you know seeing how bad the problems could be. I guess I’ll leave it at that.

Jason Hartman: Yeah, yeah. And the fact that we’ve got the biggest military, the biggest economy and the reserve currency, at least for now.

Greg Ferrell: Yes, the biggest currency, exactly. You can’t [inaudible] to me how much we benefit just by that fact and God help us if that ever ceases being the case, then we’ll lose heck, that vote of confidence.

Jason Hartman: That’s for sure, that’s for sure. Greg Ferrell, the book is Crash of the Titans, Greed Hubris and the Fall of Merrill Lynch and the near collapse of Bank of America. Of course it’s available on Amazon.com with excellent reviews. You have an individual website for the book as well, right?

Greg Ferrell: Yes, and because it’s such a popular title, it’s CrashoftheTitans.com. So CrashoftheTitansBook.com is the website and yeah, I appreciate that the Bank of America continues to be in the news. I think it’s kept my book sort of in the public eye a little longer than I thought. So, that’ good.

Jason Hartman: Absolutely. Well hey, congratulations on a great work and thank you again for joining us today. Appreciate it.

Greg Ferrell: Jason thanks for much for having me. I appreciate it.

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