Reviewing the John Thain Saga

Aug. 5.08 | About: Merrill Lynch (MER)

Merrill Lynch (MER) CEO John Thain was interviewed after yesterday's market close by CNBC's Maria Bartiromo.  Thain discussed the recent decision to sell distressed CDOs for 22 cents on the dollar, raising more capital, his critics, and future prospects.

It is an excellent interview (see it all here),  Maria, as usual, has a deft balance.  Unlike many journalists who think they are themselves the story, she has a knack for keeping the focus on the subject.  She was respectful and engaging, but not soft.  She asked the tough questions.  She also offered Mr. Thain the opportunity to cover any point that might have been missed.  It was a fair opportunity to air the issues.

The CNBC headline writer, capturing the pervasive negative sentiment of recent times, called this Merrill's Thain Won't Rule Out Further Writedowns.  (This is what we call "intern season" at CNBC.)  That was certainly not the key takeaway.    Here were Mr. Thain's key points:

  1. He sold assets because the losses from these sources were overwhelming the normal profit centers of the firm;
  2. There was no "put" of any sort given to the CDO purchaser Lone Star Funds.  Critics have alleged that since Merrill is financing the purchase, the actual price should be market lower.  Thain made it clear that there was no put provision.  Unless the securities swiftly went to zero, something regarded as extremely unlikely, the financing had a very different effect.  Most of the cash flows from the securities will return to Merrill.
  3. He does not see a reduction in the dividend, despite the dilution of shares.  While this topic will be evaluated each quarter, as it always is, he prefers to address the question by increasing the share price.
  4. The answers to past questions about the need for additional capital were based upon the circumstances at the time. Statements following various capital raises, were accurate at the time.  The downward spiral of mortgage securities caused a changing perspective.
  5. At the moment, no further capital is needed.  If circumstances change, that conclusion might change.

We shall get the market verdict tomorrow.

Our Take

There were two different ways of looking at the Thain saga.

Financial CEOs are serial liars and cheaters.  This viewpoint was embraced by several publicity-seeking pundits and bloggers, including (sadly) some of our featured sources.  Most of those criticizing Mr. Thain, while they might be intelligent people, lack the training, experience, and management skill to act as CEO of a large corporation.

Despite this, many readers embrace the opinions of these critics, who seem more like breast-beating pontificators.

Financial CEOs are optimistic about their prospects.  This viewpoint suggests that consumers of the information should apply an appropriate discount and watch carefully for changes in circumstances.


Anyone who does regular commentary (including us!) will make some bad forecasts.  If one were to go back and list the various predictions from the critical pundits, one could find plenty of inconsistencies.  They are taking a cheap shot.

A much more reasonable explanation is that circumstances changed, just as Thain reported.  (We tried to point this out a few days ago).  Consider the recent shift of opinion by an icon of the perma-bear bloggers, Jeremy Grantham.  He recently altered his stance on commodities and emerging markets (as did we!).  In defense of this position he noted, as follows:


To those who would criticize the shift, he turned to a famous utterance by economist John Maynard Keynes:



“When the facts change, I change my mind – what do you do, sir?”


Investment Conclusion

We are bothered by the unnamed CNBC staff writer's summary of the sale to Lone Star, as follows:


The fire sale nature of that deal added to concerns that the global credit crisis, which has already led to more than $400 billion of write-downs and losses at major banks, still has a long way to run.  


The moves also raised further questions about the ability of Thain, who only became Merrill's CEO in December following the ouster of Stanley O'Neal, to turn around the firm.


This is an incorrect and unduly negative interpretation of events, since financial stocks actually rallied after the Merrill move.

We think that Merrill Lynch is attractive at current prices.  We own stock and calls in various accounts, including some holdings from higher levels.