John Thain Comes Clean

Financial News has a quote from John Thain, at “a speech this month”:

“To model correctly one tranche of one CDO took about three hours on one of the fastest computers in the United States. There is no chance that pretty much anybody understood what they were doing with these securities. Creating things that you don’t understand is really not a good idea no matter who owns it.”

This is the same man, of course, who, during his tenure as CEO of Merrill Lynch, would repeatedly take a large writedown, raise capital, and say that his marks were conservative and that there would be no further writedowns or capital-raisings. And then of course he’d be back with more a couple of weeks later. Certainly Thain tried his darndest as CEO to give the impression that he knew exactly what his CDO holdings were worth, and that Merrill understood them very well. So I guess he’s now saying that he was lying?

Still, I’d like a bit more color on the “correct model” that Thain is talking about. Which computer does he have in mind? And how much faith does he have in the results? It’s hilarious to me that even after everything he’s been through, Thain thinks that if only we had more computing power, we might not have been in this mess. More likely, we’d be in an even bigger mess.

Update: The Q&A session at Wharton from which the quote was taken can be found in PDF form here. (Thanks, Cardiff!)

Comments

[DrBenway:]

What else would you expect the CEO of a company to say? "My company is broke and I have no clue what we've got on the balance sheet!"

Thain did a decent job under the circumstances for his employees and shareholders. If he told the truth, Merrill would follow Lehman with shareholders getting zero and employees getting canned.

By the way, he was specifically referring to CDO-squared when he said it would 3 hours to model on tranche, not plain CDOs. CDO-squared was an idiotic product no one could quite understand and should have never been introduced.

I have no idea how you could possibly conclude from what he said that "if we had more computing power, we might not have been in this mess". There is absolutely nothing in what he said to even remotely imply that.

Did you even read the transcript???

Oct 07 11:36 AM

[Big Jack58:]

I think this is the last Felix article i'm going to waste my time with. His writings do not provide valuable, in-depth understanding of the topics that will ultimately help the readers draw a conclusion and possibly change the future. What he does is reinforce the fact that any hairbrained moron with a computer can put their unrefined ideas (slanted with biased opinions) in writing for the mass public to vomit over. He does not sufficiently research his topics, his analytical skills are suited for a checkers player (when we're playing chess) and therefore, his conclusions are not fit for my toilet.

Oct 07 12:02 PM

[bankbank:]

"It’s hilarious to me that even after everything he’s been through, Thain thinks that if only we had more computing power, we might not have been in this mess. More likely, we’d be in an even bigger mess."

This isn't what he's saying at all. He used "correctly" to say that these securities were very difficult to price and required a great deal of computing power to do so. Your interpretation is of him saying that with a "correct" model, the securities would have been okay to trade and would not have caused the problems they did.

It seems like you're looking for any excuse to shoot Thain down and you will twist things in any way to do so. It's a pretty bad analysis on your part, and it portrays you as some combination of ignorant or lazy. Perhaps a bit of populist rabble-rousing, as well?

Oct 07 03:10 PM

[AK77:]

Do you think John Thain actually modeled CDOs himself? ever? Its funny if you think so. Thats not how this business works. CDO are complicated, yes. Tough to value, yes. The information is available in most cases and the technology was evolving, it just didnt evolve quickly enough to make these instruments transparent quickly. CDO is a technology and as with any technology, garbage in, garbage out.

Oct 07 03:35 PM

[notsosmart:]

phony AAA ratings didnt help but lying ceos is par for the course.lying & coverups(even adultery)is not shameful anymore.the more outrageous the behavior the more the dumb-dumb sheeples want in their leadership & entertainment stars.all that counts is the bottom line & if its good it doesnt matter how it got good.so what if the sports stars dope themselves as long as they win.

Oct 07 05:34 PM

[Mill Rat:]

Given that John Thain did not even join Merrill Lynch until November of 2007, I would assert that the real culprit behind their demise was the previous leadership (under Stanley O'Neil). By late 2007, the damage was already done.

www.boston.com/busines.../

On the other hand, I'm not sure I would call him a financial genius, either.

Oct 07 08:03 PM

[Mill Rat:]

Attached here are links to 2 in-depth articles ("white papers") about the behavior of CDO's-squared and their risks. One is from Nomura (published in 2005). One is from Fitch (published 2004).

www.math.ust.hk/~maykwok/courses/MAFS...

www.fitchratings.com/d...

One might be tempted to describe these "white papers" as a description of the mathematical output of "models". But, I'll let you judge for yourselves.

Oct 07 08:17 PM

[Mill Rat:]

It looks like the Nomura link did not get attached properly.

www.math.ust.hk/~maykwok/courses/MAFS...

If the above does not go completely go through, and you only get the home page, click the following sequence of links, beginning at the home page:
"People"
"Faculty"
"Kwok, Yue-Keun"
"MAFS521"
"Nomura - CDOs - Squared-Demystified"
or you can 'search engine' the last item on this "chain" of links.

Oct 07 08:32 PM

[jimmy46:]

Creating things that you don’t understand is really not a good idea no matter who owns it""""""""

HE DIDN'T UNDERSTAND WHAT WAS GOING ON YET HE THOUGHT HE SHOULD BE PAID TENS OF MILLIONS OF DOLLARS JUST BECAUSE HE WAS AT THE TOP OF THE DUNG HEAP AT MER??????????

BUT THIS IS TRUE OF HALF THE CEO's,
WHY PICK ON THAIN JUST BECAUSE HE'S HONEST ENOUGH TO ADMIT HE WAS INCOMPETENT.

THE REFORM WE NEED MOST IS HOW CEO's ARE CHOSEN .

Oct 08 03:51 PM