Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

John Thain

John Thain: Lack of Perspective and Judgment

On Thursday January 22nd 2009, John Thain, the former CEO of Merrill Lynch, resigned from his new post at the merged Bank of America Corporation. Bank of America Chief Executive Ken Lewis flew to New York to talk with Mr. Thain on Thursday, and they mutually agreed "that the situation was not working out" and that he would resign, said Bob Stickler, a spokesman for Bank of America.

Some privately say though that Mr. Thain was fired after the banking giant lost confidence in his leadership, particularly during the transition period since the acquisition was announced in the hours following the collapse of Lehman Brothers on September 14th 2008. Apparently Mr. Thain failed to tell the acquiring bank about mounting losses at Merrill in the fourth quarter. Those losses apparently totaled more than $15 billion and which were much larger than Bank of America had factored into its acquisition analytics.

The shareholder votes were held on December 7th approving the merger. At the time, the large Merrill losses were not disclosed. Sometime later in December, the Merrill Lynch merger team and not Mr. Thain himself informed Bank of America of the losses, quite a bit apparently attributable to soured trading positions. These losses prompted Bank of America to seriously consider walking away from the deal and eventually led to another contribution from the TARP fund earlier this month.

Press reports indicate that Mr. Thain at the time was off skiing in Vail, Colorado. When he returned, apparently on a head count adjusted basis, the Merrill bonus pool was distributed to firm employees three days before the merger was concluded. That bonus pool is said to have been down less than ten percent from the 2007 levels. That is right! Less than a ten percent year prior when most other firms distributed pools that were less than half of the prior year!! Mr. Thain also was apparently scheduled to shortly depart for Davos, Switzerland where the World Economic Forum will be held later this month. This was despite strong hints from others at Bank of America that such a trip would not be appropriate at this time.

Merrill Upped Ante as Boom in Mortgage Bonds Fizzled

Toomre Capital Markets LLC("TCM") has previously written about Jeff Kronthal Returns to Merrill Lynch and the absolutely abysmal performance put in by former CEO Stan O'Neal in the TCM post Merrill Lynch's Stan O'Neal: Why Is He Even Still Employed? Ahead of Merrill Lynch's expected announcement of abysmal first quarter earnings, on Wednesday April 16th 2008, The Wall Street Journal ran a front page story written by Susan Pullman (and others) entitled Merrill Upped Ante as Boom in Mortgage Bonds Fizzled. While the article sheds favorable light on Merrill Lynch's new CEO John Thain and (old TCM friend) Jeffrey Kronthal since their respective arrivals in December 2007, the article absolutely savages the former Merrill Lynch fixed-income and senior management. With the expected total write-downs now expected to approach $30 billion, it is very clear how absolutely out of control Merrill Lynch truly was since mid-2006 when Jeff Kronthal was famously relieved for not taking enough risk in the Collateralized Mortgage Obligation ("CDOs") business.

This article explains Merrill Lynch "revved up its production of complex debt securities -- despite a shortage of buyers for them -- in what turned out to be a misguided effort to limit its losses. Its torrid underwriting loaded Merrill with exposure to mortgage securities, whose top credit rating provided scant protection when investors fled. Then Merrill made another fateful move: trying to hedge some of its massive mortgage risk through bond insurers whose strength was questionable." Now among those that are keenly interested in learning what went wrong and when the Merrill Lynch managers knew the extent of their troubles is the Securities and Exchange Commission ("SEC"), which "is examining whether Merrill and other firms should have told investors sooner about the stumbling mortgage business last year."

From the article, in 2006 risk controls at Merrill Lynch were beginning to loosen. Apparently a senior risk manager, John Breit, then the head of market-risk management, was ignored when he objected to certain underwriting risks. It is suggested that as a result, senior Merrill Lynch management then demoted the head of market risk management position within the management hierarchy lead to Mr. Briet's resignation. The article continues,