John Thain, who led Merrill Lynch when it was bought by Bank of America, has pledged to repay $1.2 million US he spent to renovate his office. (Canadian Press)

New York's attorney general issued a subpoena Tuesday to former Merrill Lynch CEO John Thain amid an investigation into bonuses Merrill paid executives just before it was sold to Bank of America.

Thain, 53, was head of the newly combined company's wealth-management division before he resigned last week, shortly after reports surfaced that billions of dollars were paid to Merrill executives in late December.

Also subpoenaed was Bank of America's chief administrative officer, J. Steele Alphin.

The bonuses were paid as Merrill was about to report a $15-billion US fourth-quarter loss, and while Bank of America was seeking more federal funds to help it absorb the mounting losses at the New York-based investment bank.

Attorney General Andrew Cuomo's investigation will centre on trying to determine why the timetable for paying the bonuses was moved up to December from its normal period in January; who knew about the bonuses; and how Merrill could justify spending billions of dollars on bonuses knowing its was on the brink of reporting a multibillion-dollar loss for the quarter, a person familiar with the probe told the Associated Press.

The person spoke on condition of anonymity because the investigation is ongoing.

Bonuses said to have totalled $4B

Bank of America has said in recent days it knew about the bonuses, but had no authority over the payout because the Merrill sale had not been completed.

On Monday, Bank of America spokesman Scott Silvestri said: "John Thain and the Merrill Lynch compensation committee made the decision on the amount and timing of year-end compensation at Merrill Lynch. We had no legal right to challenge it."

Bank of America did not immediately return calls seeking comment Tuesday about the subpoenas. A spokesman for Thain declined to comment on the investigation.

Thain has said Bank of America knew of Merrill's losses and bonuses before the purchase closed.

He defended the reported $4-billion-US bonus pool Monday in an interview with CNBC, saying that "if you don't pay your best people, you will destroy your franchise."

"Those best people can get jobs other places, they will leave," he said, adding that on "Wall Street, people's salaries tend to be relatively small. And their bonuses are the vast majority of their compensation for the year."

Thain apologizes for costly renovation

Thain also said he plans to reimburse Bank of America for a $1.2-million renovation of his office a year ago, adding that "it is clear to me in today's world that it was a mistake."

"I apologize for spending that money … on those things," he said in the interview.

When asked why he made the renovations, he said former CEO Stan O'Neal's office "was very different than the general decor of Merrill's offices. It really would have been very difficult for me to use it in the form that it was in.... It needed to be renovated, no matter what."

"I should have simply paid for it myself," he added.

The government helped orchestrate the acquisition of Merrill by Bank of America over the same weekend in September that another investment bank, Lehman Brothers, went under, setting off the most intense period of the financial crisis.

Bank of America has received $45 billion in funds from the government and a guarantee protecting it against billions of dollars in losses on risky investments — mainly from Merrill — as it looks to strengthen its balance sheet amid the ongoing credit crisis.

Amid the investigation into the Merrill bonuses, the New York attorney general's office also said it will investigate executive compensation for all institutions that received federal funds as part of a $700-billion bailout program run by the Treasury Department.

The office will work with a special inspector general, Neil Barofsky, who is reviewing banks' use of the government funds.