As Merrill Lynch Sputtered, It Made a Big Bet on Brazil

By ANTONIO REGALADO

Last spring, Merrill Lynch & Co. made a huge bet in Brazil when it poached former UBS AG investment banker Alexandre Bettamio and nine other deal makers there, offering them millions in guaranteed bonuses. Mr. Bettamio got at least $7 million, according to people familiar with the matter.

But the firm's investment bankers in Latin America, including Brazil, Mexico and Argentina, earned revenue of only about $50 million through late December, while piling up at least $100 million in expenses, most of them compensation-related, one person familiar with the results said. Merrill declined to comment on the figures.

While the numbers are barely a blip in the securities firm's overall net loss of $27.6 billion in 2008, the situation is an example of investment bankers costing their firm far more than they earned. The bonuses also show how aggressively Merrill was willing to pay for talent as it revved up its ambitions outside the U.S., at a time when the firm was suffering from crippling trading losses.

New York state's attorney general, Andrew Cuomo, and House Financial Services Chairman Barney Frank (D., Mass.) on Monday sent a joint letter to Bank of America Corp. Chief Kenneth Lewis, whose firm agreed to buy Merrill in September, demanding he immediately disclose details about individual bonuses paid to Merrill employees in December. Mr. Cuomo is investigating Merrill's decision to pay out big bonuses in December in the face of losses at the firm. BofA is resisting requests by his office to turn over bonus data.

During the markets' boom, guaranteed payments and other perks were routinely dangled by Wall Street firms trying to beef up their operations around the world. Merrill wasn't considered especially lavish, but its payment of about $3.5 billion in bonuses during the firm's final days as an independent company is casting an unflattering light on Merrill's wider compensation practices.

Among the Merrill executives subpoenaed by Mr. Cuomo as part of his probe into bonuses paid by the firm in December is Andrea Orcel, Merrill's top investment banker, who was instrumental in the Brazil hirings. Former Chairman and Chief Executive John Thain also saw Brazil as one of the firm's most promising opportunities for growth.

To lure the 10 investment bankers in Brazil, who came largely from UBS and Credit Suisse Group, Merrill offered guaranteed payments believed by recruiters and people familiar with the firm's operations to be worth roughly $50 million to $60 million in cash and stock.

A spokeswoman for the Bank of America unit that includes Merrill said the company doesn't comment on bonuses, but the Latin American operations were profitable overall in 2008. "Merrill Lynch had its second-most-profitable year ever in Latin America last year, and Brazil was the largest contributor to this achievement," the spokeswoman said.

An underwriting bonanza in initial public offerings of stock had helped turn São Paulo into one of the world's most lucrative markets for investment bankers, partly because of a short supply of talent. By 2007, compensation along the city's version of Wall Street, an avenue called Brigadeiro Faria Lima, was 20% to 30% higher than for equivalent positions in New York, according to recruiters.

Merrill wasn't the only firm to offer large payouts in Brazil. But few rivals expanded as much so late in the market's frothy days. "Those were realistic numbers for the market at that moment," says Ademar Couto, a recruiter at the Ray & Berndtson Group. "Today, they are totally out of reality."

According to a Merrill memo, the "large scale team lift" was meant to invigorate Merrill's business and prove "damaging" to the two Swiss banks, among Brazil's top players in investment banking. In the 1990s, Merrill was a major force in Brazil, but then lost market share by missing out on a wave of IPOs by medium-size firms.

As recently as September, Merrill still was touting Mr. Bettamio and his colleagues, including Adriano Borges, a real-estate deal maker hired away from Credit Suisse. The team got a plug by Mr. Thain and BofA's Mr. Lewis shortly after the Charlotte, N.C., bank announced it was buying Merrill.

Yet Merrill's timing in ramping up its Brazilian operations couldn't have been worse. By the time Mr. Bettamio's team came aboard, the IPO market in Brazil had sputtered to a near-halt.

By the end of last year, Merrill had lost even more luster in the region. For the full year, Merrill slid to 10th place or worse in Latin America in debt, equity and merger-and-acquisition activity, according to Thomson Reuters. In Brazil, the bank handled just $330 million of new equity deals, ranking Merrill 14th, with a market share of 1.6%, down from a No. 5 ranking in 2007.

It didn't help that Merrill had to pull out of an IPO in June by oil explorer OGX Petróleo e Gás Participações SA after Merrill's oil and gas analyst in New York contested the company's lofty $22 billion valuation. That cost Merrill about $30 million in fees.

Despite its poor results, Merrill still owed millions in guaranteed bonuses, leading to a scramble to pay other bankers. Mr. Bettamio, who is now in charge of Merrill's overall operations in Brazil, didn't give up any of his bonus, said people familiar with the situation. However, after Merrill canceled year-end parties as a cost-saving measure, Mr. Bettamio used his own money to pay for a party in December for his entire office at Cafe de la Musique, a trendy cafe in São Paulo.

Bank of America said it still expects the hirings to pay off for the firm. "We hired the team with a long-term plan in mind, and we are pleased that they are meeting our expectations," the spokeswoman said. "We are committed to continue building our franchise and our capabilities in Brazil."

Write to Antonio Regalado at antonio.regalado@wsj.com