Thain's Undoing: Thinking He's Worth It

The stunning announcement of John Thain's departure from Bank of America (BAC) Thursday, less than a month after merging Merrill Lynch (MER) into the bank, would have been unthinkable a few weeks ago.

After announcing the shotgun marriage of Merrill Lynch with Bank of America in September, hours after Lehman Brothers collapsed, the sterling reputation of John Thain was cemented: This was a CEO who could do no wrong.

Revelations leaking out of Bank of America in the last few days and Thain's departure alter his image -- perhaps irreparably. Observers now wonder how this quiet, smart overachiever could have shown such poor judgment. After all, this is a man who rose through the ranks at Goldman Sachs (GS), turned around the New York Stock Exchange (NYX) and merged it with Euronext and then had headhunters and corporate boards falling over themselves offering him numerous CEO spots.

There are 5 puzzling decisions Thain has made in recent weeks that ended up being his undoing:

1. He decided to move up Merrill's bonuses which are typically paid in January to December, prior to the closing of the merger with BofA. The payouts amounted to $15 billion, only a 6% drop from last year. Bank of America sought an additional $20 billion from the Treasury days later (this after requesting a $10 million bonus for himself for 2008, which was rejected by his board).

2. He did not come to BofA CEO Ken Lewis immediately to disclose Merrill's fourth-quarter loss after a sharp erosion of Merrill's book of business.

3. He left New York to go on a family ski vacation in Vail at the time news broke about the Merrill bonuses.

4. He planned to attend the upcoming Davos meeting, even though the financial industry is once again under extreme strain and BofA has advised against it.

5. He reportedly ordered an expensive redecoration of the Merrill corporate offices using his personal decorator in early 2008 at the same time he was preaching cost cuts to his new employees. (Among the expenses reported: $87,000 for an area rug, $11,000 for a "Roman shade" and $243,000 in salary and bonuses for Thain's driver last year.)

The last detail prompted short-seller Doug Kass to draw comparisons with now-imprisoned former CEO of Tyco (TYC) Dennis Kozlowski, who famously approved a $6,000 shower curtain for the corporate apartment he stayed at in New York. (Kozlowski actually looks frugal compared to Thain.)

What's interesting about the comparison between Thain and Kozlowski is that both were highly regarded prior to these scandals. At the time of his hiring, new Merrill CFO Nelson Chai complimented Thain's intelligence: "When you're the smartest guy in the room, which he typically is, you come at things from a different altitude."

How could someone so smart, make these poor decisions? And if it can happen to Thain, who will be the next golden CEO to drop? How can you spot the next smart executive to fail?

Sydney Finkelstein, a Professor of Management at Dartmouth's Tuck School of Business with whom I've worked on consulting projects, published a 2004 business best-seller called "Why Smart Executives Fail" that looked at 60 successful CEOs who later failed, including Kozlowski, Enron's Ken Lay and Jeff Skilling and George Shaheen of dot-bomb Webvan. The book is a great read -- and very current, given what we're living through.

Finkelstein summarizes what he calls the "Seven Habits of Spectacularly Unsuccessful Executives." One of those habits seems very relevant to John Thain: "They identify so completely with the company that there is no clear boundary between their personal interests and their corporation's interests." This was the habit that derailed Kozlowski, in Finkelstein's opinion. Here's a brief excerpt from the book on this trait:

We want business leaders to be completely committed to their companies, with their interests tightly aligned with those of the company. But digging deeper, you find that failed executives weren't identifying too little with the company, but rather too much. Instead of treating companies as enterprises that they needed to nurture, failed leaders treated them as extensions of themselves. And with that, a 'private empire' mentality took hold.

CEOs who possess this outlook often use their companies to carry out personal ambitions. The most slippery slope of all for these executives is their tendency to use corporate funds for personal reasons. CEOs who have a long or impressive track record may come to feel that they've made so much money for the company that the expenditures they make on themselves, even if extravagant, are trivial by comparison. This twisted logic seems to have been one of the factors that shaped the behavior of Dennis Kozlowski of Tyco. His pride in his company and his pride in his own extravagance seem to have reinforced each other.

In the case of Thain, he signed off on these expensive corporate renovations after Merrill "won" the battle to get him as CEO (remember Citigroup wanted him too). At the time he took over the company a year ago, he was one of the kings of Corporate America. He might well have felt justified in green-lighting these expenses and using his own decorator.

It's also interesting to note that, in all the criticism of how Ken Lewis of BofA failed to do sufficient due diligence on Merrill prior to announcing the deal, no one has criticized John Thain for insufficient due diligence on Merrill prior to taking the top job. At the time of his hiring, he assured the press that he'd been given complete access to Merrill's books. Apparently he did a poor review. When Merrill's fortunes started to go south, no one went back to ask Thain about this oversight.

What this sorry episode teaches all analysts, media, and investors is that we need to appreciate success and achievement but always remain skeptical. We shouldn't be afraid to ask tough questions even about "untouchable" CEOs like Apple's Steve Jobs, JPMorgan Chase's Jamie Dimon, or General Electric's Jack Welch. Past success no longer guarantees future success in today's world.

Unfortunately for BofA shareholders, no one had warning signs about Thain until the last 72 hours. (And let's not forget that, if you're a Merrill shareholder, you are overjoyed that Thain sold this company at such a premium and kept the fourth-quarter loss under wraps until the deal went through.)

One thing's for sure: If you're a company insider and you hear about a big corporate office renovation, starting looking for work and start selling your insider stock right away.

Neither Eric Jackson nor his fund owns stock in Merrill or BofA.

Comments

[Donald Johnson:]

I'm guessing Thain had his office decorated to impress investment banking prospects and clients as well as the executives of potential acquisitions.

People who don't sell big ticket services won't get it or appreciate how such a show of wealth might attract business or intimidate a director or someone else who dare challenge the CEO of Merrill.

What Thain didn't anticipate a year ago was having to sell Merrill to somebody from North Carolina. He didn't anticipate close public scrutiny nor being the target of socialists like Barney Frank and Barack Obama who are as greedy for power as Thain is for wealth.

After all, Obama spent $150 million on his inauguration. Now that's unconscionable. And Barney Frank spent $12 million of taxpayers' money to bailout a MA bank, which was just typical.

Jan 25 04:29 PM

[Donald Johnson:]

Trying to understand Thain's thinking.

By paying the Merrill bonuses before the BofA takeover, was he trying to hold the place together because he knew Ken Lewis and his board wouldn't have to good sense to retain valuable brokers?

Did he really cover up MER's fourth quarter results, or is Lewis just shifting the blame for a dumb deal to Thain?

Didn't he deserve a vacation after saving billions for MER shareholders, possibly saving the firm for its employees and sucking Lewis into a bad deal? Will people complain if Lewis or Obama take vacations before the financial crisis resolves itself?

Do people waste a week in Davos for the sunshine? Aren't there important clients and prospects who need to be reassured and wooed in Davos?

Sure is a lot of small thinking wealth envy out there, I'm thinking.

Jan 25 04:44 PM

[pimpjui:]

The reality is that most of these invetment banking leaders who are being bailed out by the government are:

1. Not that smart
2. Very poor investors
3. Very poor leaders/managers

These people as a group have had a relatively sweet position in society because the government has let them have access to lots of free capital in there positions as "liquidity providers" and at the same time turned a blind eye to the risks that they were taking. Understandable when this group of people are generating so much corporate tax revenue. Of course they are not generating any tax revenue now.

Not that smart. Even a 1st year finance grad student can see that their business models are overly dependent to leverage, and their risk models are bogus. I find it strange that a PhD in Electical Engineering only just a engineer when he's doing electirlcal engineering, but somehow a genius when he's doing quant finance.

Poor investors. The main problem, in the end of the day is that these pathetic "investors" can't take a drawdown on their account. Any moron can leverage up to infinity if the banking system allows it. I wish that someone would bail me out everytime I had a drawdown on my account that could break me.

Poor leaders/managers. I am pretty certain that we coud fire all of the managers of these failed institutions, and promote everyone at the same companies from the bottom up, and still not be a position any worse than now. If these "managers" are now government employees, they should get the same pay and benefits as government employees. Their modus operandi is to milk the system for as long as they can get away with it. Get rid of them, the country has nothing to lose. There are plenty of competent people who can do a better job.

Jan 25 04:59 PM

[Blenderecon...:]

Donald Johnson,

Not sure if you work for Merril or someone else but to come from it from this viewpoint is seriously scewed. Wealth envy? Come on! Any adult can see this behaviour is criminal.

People are outraged that a person in this position would let his firm get into this position and then show an sickening sense of entitilement by paying out bonuses with tax payer money.

Ultimately John Thain is the poster boy for the sick culture of the top Financial Institutions in this country. I think there are a lot of people at I banks who would have made the same decision as Thain and hence that is why the system is broken. When all you do is manipulate the system for your own bonus pool then we have to throw them all out.

There are people in this country who have created wealth by taking risks, working hard, and acting responsible along the way. The behavior of Thain is an insult to them - truly. The behavior is very unAmerican to me. Although one has to wonder if this is what our country has come too? People believing that the rules don't apply, they aren't responsible for the outcome of their actions on others, and as long as they make out okay who cares about anyone else?

I have come to the decision that we have to take all these companies to zero. The government has to nationalize the big ones and we put the pieces back into private hands, guaranteeing the loans and deposits along the way. To me, banks should become utilities - take deposits and make loans in a highly regulated manner. Let the risk go into small private enterprises that don't have a government put. That way if you do invest in one of these companies and Thain pulls this crap we can put him in jail!

Jan 25 05:00 PM

[john s. gordon:]

in classic times the greeks had a word for it.

hubris.

> jack

Jan 25 05:02 PM

[Marley Dog:]

Just another a--h--- who thinks he is better than the normal person.I can't understand why we can't have normal stock holders on the boards.Right now all we have is the good old boys.I will sit on your board if you will sit on mine.
Scotty

Jan 25 06:35 PM

[Marley Dog:]

Thanks

Jan 25 06:37 PM

[Robins Hood:]

All this makes me wonder when JPMC (Just Pickup My Check) will really stumble. Rumour has it that JDimon has been installing a wine cellar near his office.

Jan 25 06:57 PM

[investor88:]

Thain actions may be justified depending on how you argue but with the dire economic backdrop he was probably insensitive and lost basic "common sense".

Jan 25 08:01 PM

[Tiredofempt...:]

The clown that was supporting the office overhaul must be one of these less than intelligent bankers. Apparently the prior Merrill CEO office was clearly not working - that was the source of Merrill's troubles. If only Stan O'Neal had redecorated the office earlier none of this would have happened! That must be why Thain is so smart - he saw through the mess to the real problem!

Jan 25 08:16 PM

[Anthony Alfidi:]

"One thing's for sure: If you're a company insider and you hear about a big corporate office renovation, starting looking for work and start selling your insider stock right away." Some inside positions are subject to lockups, so check with your financial adviser first.

BTW a lot of these "revelations" about Thain are sourced from close to the top at BofA, so the PR campaign to save Ken Lewis' job is in full effect.

Jan 25 10:11 PM

[Anthony Alfidi:]

Prudentinvestor, you'd like what Carl Icahn has to say about corporate governance reform at www.icahnreport.com/ .


On Jan 25 02:25 PM prudentinvestor wrote:

> You ask: "How could someone so smart, make these poor decisions?
> And if it can happen to Thain, who will be the next golden CEO to
> drop? How can you spot the next smart executive to fail?"
>
> Are you sure that Thain, or so many just like him on Wall Street,
> are really that smart? They've certainly used the media to indoctrinate
> us that, because they are "the smartest guys on the planet", they
> each deserve the pay of a thousand doctors, or thousands of scientists
> or engineers.
>
> Aggressive, yes. Manipulative, yes. Self-promoting, yes. Charismatic,
> maybe. But smart? If they were even remotely deserving of this adjective,
> we would not be in this situation.
>
> Amongst the many items of reform we need, is new regulations for
> corporate governance of publicly-traded companies. This has deteriorated
> and allowed incompetents to destroy many of our greatest companies.

Jan 25 10:12 PM

[Syl:]

Since we are on a blame train let's take a look at Bank of America. How can one approve the investment of millions of dollars in a Chinese bank that their government could nationalize at a moments notice? As I recall that investment came just a few days after the BAC offiicials went begging the Feds. for a loan. In a period of time we taxpayers are helping improve the financial condition of a potental enemy.

Jan 25 10:39 PM

[drone:]

The majority of SA readers/contributors are free marketers, so this is what you get. Quit your blubbing and move on.

Jan 25 11:54 PM

[zanardm:]

Change at Fed Reserve

Bring in Thain as Fed Reserve Bank top manager, together with an IT team to replace and upgrade software for security and reliability. Then bank management team. One needs bank management controls, and accountability and transparency, in order to minimize debt, other than congressional/adm budget debt, of course. The Fed has already shot an enormous wag, with NO result. It's time for a change to a conservative play. Close the windows! Bring in a team and a bank manager as head - Thain

Jan 26 12:12 AM

[M-P:]

Bottom line, smarts are not enough. There are plenty of high IQ people who make dumb decisions (at some point). In actuality, the higher your IQ - in general - the more likely you are to having a hardening of the attitudes - there is a relatively strong correlation with one's IQ and their willingness to incorporate contradictory opionions. What is means to be "smart" is another question. It's one thing to spend your own money on whatever you want - I don't really care - but when you spend taxpayer or shareholder money on excess, it calls attention. What makes you great can also be your downfall - many executives have hubris, ego and confidence. Like most things, some is good, but more is not necessarily better. Dose-response issue.

Jan 26 08:37 AM

[notsosmart:]

he might be eligible for unemployment?LOL.its capitalism-dumb-dumbs.

Jan 26 11:50 AM

[34CD77:]

Such a lot of bull from probably guys that have so little sense. To have a $1mm office is necessary to have a Shah for a client. We are talking about billion dollar accounts.
As to the bonases, what do you think BofA bought. I'll tell you. They bought the smartest..best trained people in the world of finance. Don't you understand. This money was spent to keep them at Merrill. Much of the so called money was stock options which have no real value until the stock is higher.
And as far a BofA is concerned, to have this expense on Merrill's books is better than on Bof A books.
And sometime, all you smart people, think what would have happened if Merrill had not combined with BofA. ..Merrill stockholder's would have lost billions. Thank you John Thain. BofA has tried for years to buy Merrill. Now they have it and with any luck the future will improve and BofA will be the biggest and the best.It will take time
As to John Thain, he boarded a sinking ship. O'Neil had fed the appititte of the greed on Wall Street. When the good mortgages had been packaged and sold , Wall Street demanded more product and with the help of people like Rubin and Clinton, the standards were lowered to get all these people who hadn't saved a nickel into their dream homes. As well as to get everyone a credit card for every occasion. We all are to blame for the mess....not John Thain. Give him a break!

Jan 26 01:12 PM

[socratestes:]

I thought that it was a virtue in the American ethos to screw before being screwed, the proviso being that you don't get caught. It seems to me that if Thain hadn't "got caught" by events, this conversation wouldn't even be taking place. The yardstick used to judge rightness and wrongness in these matters appears suspiciously flexible, hence the "hero to zero" phenomena.

Jan 26 07:34 PM

[WMBANZAI7:]

YOU'RE JOHN THAIN
(You're so Vain, Carley Simon)
WilliamBanzai7

You waltzed into the Bail Out party
Like you were sailing on an unsinkable yacht
Your hat strategically dipped below one eye
Your scarf it was really hiding a mega Merrill subprime surprise
You had one eye on the Level III mirror
As you watched yourself gavotte
And all those second rate Charlotte Bankers dreamed that they'd be your partner
They'd be your partner, and

You're John Thain
And yes this song is about you
Don't complain
I'll bet you thought B of A could'nt live without you
Without you? Without you?

You had Ken Lewis several months ago
When he was so naive its hard to believe
Well, you said that the Thundering Herd would make an awesome notch on his sleeve
And that you John Thain would never leave
But you gave away the things you loved
And one of them was a 10 Million Dollar bonus snub
And good ol Ken's grandiose dreams turned out to be clouds in his bailout coffee
Clouds in his bailout coffee, and

You're John Thain
And yes this song is about you
You're John Thain
I'll bet you thought B of A couldn't live without you
Without you? Without you?

Jan 26 10:51 PM