The Failure of John Thain

Want proof that CEOs are overpaid? Just look at the mind-bogglingly awful Merrill Lynch announcement yesterday. It's hard to know where to start: maybe the fact that Merrill is selling off $30.6 billion of CDOs to Lone Star for just $6.7 billion, of which $5 billion is Merrill's own money. If there are any losses over and above the $1.7 billion difference, Merrill takes them, not Lone Star. Or maybe it's the fact that Merrill valued those CDOs at $11.1 billion as of June 30. Or maybe it's the fact that Merrill is effectively raising new money from Temasek at less than $7 a share, once you net out payments from Merrill to Temasek.

In any case, what's utterly clear is that John Thain has lost all his credibility.

Remember January's conference call? Thain was on top form: the worst was over, there wouldn't be any more capital raising, assets wouldn't be sold, and there couldn't be any more CDO writedowns, since Merrill was putting on $23 billion of short positions against the CDOs exposures it retained.

All of Thain's promises in January - all of them - have been broken. If it had been Stan O'Neal making the same promises, he would be the world's biggest laughing-stock at this point; as it is, it seems he left just in time. When Thain took over, Merrill was trading at $58 a share; now it's less than half that level.

Clearly what's going on here is bigger than any CEO. Thain didn't dither and make incomprehensible pronouncements; he was bold and clear about what he was doing and why he was doing it. But it didn't help. And now even he has been reduced to the status of a jargon-spewing robot:

"The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts," said John A. Thain, Chairman and CEO of Merrill Lynch. "Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position by issuing common stock. The actions we announced both today and on July 17 will materially enhance the company's capital position and financial flexibility going forward."

Don't bother trying to find meaning in that prose, there isn't any. As Roger Eherenberg points out, Merrill's still being decidedly opaque on what kind of exposures it's retaining. Over the past six months, Thain has gone from visionary to embattled and defensive, and at this point he's no better than anybody else.

 

Or, to put it another way, CEOs don't matter: if the company is going down the toilet, neither John Thain nor anybody else is going to prevent it from doing so. You could have put a monkey in charge, and the outcome wouldn't have been materially different.

Comments

[AxenFic:]

and the dilution from Bloggers dont matter either! You are really great at calling the shots from you couch at home. You get filed in the bucket of "GAS-parino" wanna-be's...your 15 minutes are up

2008 Jul 29 11:30 AM

[braddunc:]

.....and we are constantly told that these obscenely overpaid CEOs and their ilk with their grotesque salaries, bonuses and perks are "worth every penny."

In China such bungling incompetence would be rewarded by being shot!

2008 Jul 29 11:48 AM

[fxtrader07:]

Great article. Spot on. And Thain got 10 million ro so just for signing the employment contract - in addition to wages and bonuses. WTF
never ever be a shareholder of a wallstreet house. you may have some good years but ultimately you will pay heavily for it.
these deals by meríll look so desperate you cannot but aks yourself whether this was the last desperate effort to keep the ship from sinking further. to me, mer looks more likely to be the next bear stearns than any other wallstreet house

2008 Jul 29 11:59 AM

[bbzz24:]

Yes, yes, we know he ain't hunky Hank. In fact he never rose to the top at GS, so your criticism is spot on.

But shouldn't such deals (as the CDO sale) be reviewed by the DOJ? It is real fishy to sell assets at face value 30bn for 1.7bn. I smell fish here (ain't you Salmon)!

2008 Jul 29 12:39 PM

[Just Say Whoa!:]

Outsource the CEOS to a temple in India!

Let them throw darts at dartboards loaded with B-school buzz words!

Now, we're talking some ROI for shareholders...

2008 Jul 29 06:09 PM

[The Jackal:]

Thain messed-up at NYX and he's doing it again at MER. The guy is a straight-up liar. He should go to jail.

2008 Jul 29 08:01 PM

[Jason Rines...:]

Do you really think bloggers on the Internet control the financial system Axen? If that is true, do you might think the bigger media influence on ever positive skew from CNBC would have negated some of the bloggers effect? I do seem to recall the NYT shilling for iBanks up until last month and that includes online. Barron's kept calling bottom which suckered more people in. Barron's is online too, guess they failed to shill hard enough, it's there fault? You have just revealed the kind of manager you are.

I had a C level executive I hired just like these guys. I used him for a roladex. He did what I expected, demand more perks and attempt to do little as possible by constantly lying about his daily activities.

2008 Jul 30 04:29 AM

[Obama is Bu...:]

You forgot to mention that Thain sold MER's interest in Bloomberg LP -- and MER financed a good part of that sale also.

MER's two great assets are (were) its retail broker network (which has little if anything to do with who is CEO) and its investment in Bloomberg -- which is now gone.

Why exactly should a retail broker accept a pay cut going forward (eg lower commissions) when Thain got a windfall? Do a good job, get punished. Do a bad job, get a windfall.... The incentive structure of Merril (and many other iBanks) is very clear.

Produce and perish. Schmooze and profit.

2008 Aug 02 06:31 PM

[Obama is Bu...:]

While you mentioned that MER is on the hook for any losses beyond the $1.7 billion -- you forgot to mention that MER will **NOT** get any upside on the off chance the value of these CDOs increases. Heads MER loses, tails MER loses more.

2008 Aug 02 07:27 PM