John Thain: A Look Back

Courtesy of the WSJ’s deal Journal, here is a quick look at some of the key events, quotes and actions from John Thain’s tenure as CEO of Merrill Lynch:

From the WSJ:

Organizational Behavior

February 2008: Bloomberg reported Thain saying , “‘I want to refocus on the company as a whole rather than on individual businesses,’ Thain said, sitting in a conference room on the 33rd floor of Merrill’s World Financial Center headquarters in lower Manhattan. ‘There was too much of a siloed structure here.’”

June 10, 2008: Thain played favorites, saying , “Merrill has a very good culture that is the strongest inside the wealth management organization.”

February 2008: “I grew up in a relatively small town in the Midwest, and I am a very straightforward kind of person,” the Illinois native told Bloomberg . “I would like to hear what you think we should be doing.”

January 20, 2009: The Journal’s Susanne Craig and Dan Fitzpatrick wrote , “On Monday a person familiar with how Bank of America obtained its information about the deal said senior executives there didn’t learn of the losses from Mr. Thain, but rather from the Merrill transition team…Some former Merrill board members and executives now are questioning why Mr. Thain didn’t inform them in December that the losses had become so outsize and that the deal might be in jeopardy…A person familiar with the matter says that Mr. Thain, 53 years old, kept whatever information he had close to the vest because he was worried that developments might leak to the media and blow up the deal, struck in mid-September.”

February 2008: “I don’t think it’s an accident that the firms that seem to have avoided these problems the best have CEOs who get very actively involved in the business,” Thain told Bloomberg. “You look at Goldman and you look at Lehman.”

January 20, 2009: “Senior executives at Bank of America sensed that Mr. Thain didn’t appear to be fully engaged in issues surrounding the deal just when the scope of Merrill’s losses was becoming apparent. In mid-December, Mr. Thain left on a vacation to Vail, Colo., and was pretty much out of touch after that, says this person,” the Journal wrote .

Capital Raising

January 17, 2008: Thain: “We were very comfortable with our liquidity position, both at the end of the year and going forward.” - Fourth quarter 2007 earnings call interview with France’s Le Figaro newspaper

March 16, 2008: Thain said, “We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem.” -to Spain’s El Pais newspaper

April 17, 2008: Thain archly told analysts, “For those of you who like to blog, we do not have any plans to raise any additional common equity and [chief financial officer Nelson Chai] actually agrees with that .”

July 17, 2008 : “Right now we believe that we are in a very comfortable spot in terms of our capital,” Thain said on the firm’s second quarter earnings call.

July 29, 2008: “Merrill Lynch will be selling $8.5 billion worth of stock to raise fresh capital. Temasek Holdings, a Singapore sovereign wealth fund that is already Merrill Lynch’s largest shareholder, will purchase $3.4 billion of common stock in the offering,” this article said .

January 15, 2009: “The first round of TARP didn’t give (Bank of America) the ability to build tangible equity, as well as fund Merrill Lynch, as well as handle loan losses and get rid of the problems on their balance sheets,” said Christopher Marinac, an analyst at FIG Partners in Atlanta, Ga . “The reality is that they need more common equity - TARP may not be enough.”

January 16, 2009: Lewis said , “As we saw the anticipated fourth-quarter losses accelerating, we did evaluate our rights under the merger agreement and during that time we spoke to and were in close coordination with officials from both the Treasury and the Federal Reserve.”

History Lessons

January 18, 2008: Thain opined that the main difference between Merrill Lynch and his old firm, Goldman Sachs, is “says Thain, 52, adopting a low, gruff Bronx accent to mimic his 68-year-old predecessor . He pauses for the laughter and applause to die down. ‘Well, I’m not a Goldman guy anymore,’ he says.’”

July 17, 2008: Thain bristles in response to an analyst comment on Merrill Lynch’s second-quarter earnings call after the firm’s startling $9 billion write-down . The analyst asked a question about the collateralized debt obligations “you guys,” at Merrill Lynch, created. “First of all, I take exception to the ‘you guys’ comment. I did not create these CDOs,” Thain retorted with annoyance .

February 2008: “When you’re the smartest guy in the room, which [Thain] typically is, you come at things from a different altitude,” CFO Nelson Chai told Bloomberg .

January 22, 2009: The Journal wrote , “When Mr. Lewis asked Mr. Thain what happened, the Bank of America CEO didn’t get a ‘good explanation for what was happening and why,’ this person said. Not only did Mr. Thain not appear concerned about the losses, but he ‘didn’t really have a good grasp of what was going on,’ this person added.

Risk Management

January 17, 2008: Thain said, “None of the trading businesses should be taking risks, either single positions or single trades that wipe out the entire year’s earnings of their own business, and of course certainly shouldn’t take a risk to wipe out earnings of the entire firm.” -Quoted in WSJ

February 2008: “The people who were here [at Merrill] - and who are not here anymore - did not do a very good job of managing risk,” Thain told Bloomberg .

June 10, 2008: “You can manage risk and manage it prudently. You can make good risk/reward tradeoffs,” Thain said at the Wall Street Journal’s Deals & Deal Makers Conference .

January 16, 2009: Bank of America CFO Joe Price told analysts, “[Of the $118 billion government backstop] 75% [will cover] Merrill Lynch legacy assets and about 25% of similar types of assets off the Bank of America platform.”

January 16, 2009: BofA CEO Ken Lewis attributed Merrill Lynch’s $15 billion loss in three months to “CDO-related exposure, auction-rate securities and legacy trading books, write-downs in leveraged finance, CMBS and private equity, additional support of the Columbia cash funds and a challenging trading environment that impacted our trading results.” Goldman Sachs analysts noted wryly, “To put [the] $15 bn after-tax [loss] in perspective, 60% of the common equity base of the company was lost in one quarter”

At the end of the day it appears that John Thain’s tenure at Merrill Lynch was responsible for producing one thing: a lifetime’s worth of damning quotes and actions that will undoubtedly follow Mr. Thain around for quite some time. The Lehman quote is probably the most damning of them all.

Still while Mr. Thain is the scapegoat for the BOA/Merrill Lynch debacle, let’s not forget that Ken Lewis’ behavior around the MER buyout falls into the same category as Mr. Thain’s: being disconnected from the business and not having all of the necessary information in front of them to make effective decisions.

While it’s easy to toss out Mr. Thain like so much trash and blame him for the buyout’s problems (as he’s earned more than his fair share of blame), it still doesn’t change the fact that BOA wouldn’t be in this mess if they had performed the proper amount of due diligence, nor will it rid BOA of the problems they’re going to have with Merrill Lynch on a go-forward basis.

I.e. if Ken Lewis and company had crossed their I’s and dotted their Ts, they could’ve avoided this mess all together.

However I wonder if the real issue is that John Thain and other recently disgraced CEOs (not to mention CEOs that are still in place like Ken Lewis), are really suffering from the fact that they’re operating within the context of/evaluating things based on various models and assumptions that have all been proven wrong over the last 2-3 years. It’s hard to expect the quality of management to improve when management is using a lot of the same ideas that created the crisis in the first place.

You can read the original article in full here.

Source:

The WSJ: “John Thain, Then and Now” - Heidi N. Moore, January 22, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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