Jan. 26 (Bloomberg) -- Former Merrill Lynch & Co. Chief Executive Officer John Thain, ousted last week after his firm posted an unexpectedly large fourth-quarter loss, apologized for paying $1.2 million last year to renovate his office and said he will repay the costs.

“They were a mistake in the light of the world we live in today,” Thain said in a memo to top executives dated yesterday. “I will therefore reimburse the company for all of the costs incurred.”

Thain was dismissed on Jan. 22 by Bank of America Corp. CEO Kenneth Lewis after Merrill’s $15.3 billion loss forced the lender to seek more money from the U.S. government and amid contentions he accelerated year-end bonus payments to Merrill employees before the deal closed. The firm, which hasn’t disclosed the exact amount of the bonuses, had $4.34 billion of total compensation costs in the fourth quarter.

In the memo, Thain said the size and timing of the bonus payments “were all determined together with Bank of America,” and noted that the bonus pool was 41 percent lower than in 2007. Thain had been the head of trading, investment banking and brokerage for the combined firm.

‘Substantially Less’

The bonus pool also was “substantially less than the amount allowed under our merger agreement,” Thain said.

Scott Silvestri, a spokesman for Charlotte, North Carolina- based Bank of America, said Merrill, based in New York, made the bonus decisions on its own.

“John Thain and the Merrill Lynch compensation committee made the decision on the amount and timing of year-end compensation at Merrill Lynch,” Silvestri said today. “We had no legal right to challenge it.”

Mark Greenberg, a spokesman for John Finnegan, the head of Merrill’s compensation committee and CEO of Chubb Corp., said Finnegan wasn’t available to comment.

Thain defended the bonus payments in an interview today with CNBC, saying they were necessary in order to retain the best-performing employees.

“You have to believe there’s value in the franchise,” he said. “If you don’t pay your best people, you will destroy your franchise.”

‘Completely Transparent’

Thain also said Merrill was “completely transparent” in informing Bank of America, which bought Merrill on Jan. 1, about the losses. The lender “learned about these losses when we did,” he said in the memo.

The fourth-quarter loss was “very large and unfortunate,” Thain said in the memo. Even so, the losses “were incurred almost entirely on legacy positions and were due to market movements,” he said, adding that the acting chief financial officer of the businesses that reported to him was Bank of America’s chief accounting officer.

Thain said his office renovations last year also included two conference rooms and a reception area. CNBC reported that he hired Los Angeles-based decorator Michael Smith, who was also chosen by President Barack Obama and his wife Michelle to redecorate the White House.

Thain paid Smith $837,000, and his purchases included $87,000 for area rugs, $35,115 for a commode on legs, $25,000 for a pedestal table and $68,000 for a 19th-Century credenza, CNBC reported last week. Thain, who took over as Merrill’s CEO on Dec. 1, 2007, began the renovations in early 2008 and moved into the new office in March of that year, two people familiar with the matter said last week.

‘Needed to be Renovated’

Thain said in today’s CNBC interview that he decided to begin the renovation because of the condition it was left in by former CEO E. Stanley O’Neal.

“It really would have been very difficult for me to use it in the form it was in,” Thain said without elaborating. “It needed to be renovated, no matter what. I should have simply paid for it myself at the time.”

O’Neal didn’t return a call seeking comment. A spokesman for Thain, Jesse Derris, declined to comment on whether his client would take the office furnishings home.

Bank of America fell 24 cents, or 3.9 percent, to $6 as of 4:01 p.m. in New York Stock Exchange composite trading. The shares had dropped 82 percent before today since the deal was originally announced in September.

Lewis is under pressure after the bank posted its first loss since 1991, cut its dividend to a penny a share and asked the U.S. government for more assistance. Shareholders are suing the bank over why it failed to disclose the Merrill losses before a vote on the acquisition took place.

As recently as Jan. 16, Lewis said he had confidence in Thain. “We are happy that John Thain has assumed a major role at Bank of America,” Lewis said during the bank’s earnings conference call.

Bank of America’s board meets Jan. 28 in a regularly scheduled meeting. Temple Sloan, a Raleigh, North Carolina auto- parts company owner who is the bank’s lead independent director, hasn’t returned phone calls seeking comment. Lewis has been CEO since 2001 and is the third person to lead the bank since 1973.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net

Last Updated: January 26, 2009 17:22 EST