John Thain on the Fire Sale of Toxic Assets at Merrill

"It [is] almost impossible—not totally, but almost impossible—that we would ever have exposure on these loans"

by Maria Bartiromo

Browse Issues

Browse the BusinessWeek Archive

Larry Fink of BlackRock: Thain calls the firm "a strategic asset" Jennifer S. Altman

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

Merrill Lynch CEO John Thain at the World Economic Forum in Davos in January 2008. Fabrice Coffrini/AFP/Getty Images

Ever since he took charge at Merrill Lynch (MER) in November 2007, former New York Stock Exchange (NYX) chief John Thain has been struggling against enormous odds to revive the storied investment bank, badly battered by the global credit crisis. He's selling Merrill's stake in Bloomberg, and on July 28 he made his most radical move so far, unloading billions of dollars in toxic mortgage investments to the Dallas private equity firm Lone Star Funds for pennies on the dollar. I talked with Thain on Aug. 4.

MARIA BARTIROMO
You've made some extraordinary moves in the past week, selling more than $30 billion worth of CDOs [collateralized debt obligations] for the bargain price of $6.7 billion, or 22¢ on the dollar, compared with the 36¢ you valued the securities at just a quarter before. Why take this hit and do the sale immediately?

JOHN A. THAIN
This sale of CDOs is a huge move in reducing the risky assets on our balance sheet. It's a continuation of the process we've been going through for the past seven months, but it's most significant in that these assets and their related hedges represent approximately 70% of all the losses that we've taken over the past 12 months. And the ability to get this sale done in one bulk trade to a single buyer, where there has been almost no liquidity in this marketplace, made sense for us both to reduce risk and eliminate the overhang of continued losses from asset devaluations.

Explain this deal to me, because people still don't get it. They feel that you still have exposure here. If Merrill is financing 75% of the purchase price, and Lone Star can put the CDOs back to Merrill if they drop too much in value, don't you still have downside exposure? How has the bank's risk been reduced?

First, there's no put back to us whatsoever. Second, the financing is structured in a way that makes it extremely unlikely that we would ever have any exposure on these assets again. It is a true sale. And the paydown on the cash flows amortizes our loan in a way that makes it almost impossible—not totally, but almost impossible—that we would ever have exposure on these loans.

The International Herald Tribune reported that Lone Star has the right to put the CDOs back to Merrill. So you're saying that is wrong?

That is wrong.

Let me ask you about your credibility, John. I last spoke to you for BusinessWeek when you first took the Merrill CEO job in November of '07. At that time you said you saw 6 to 12 months of subprime pain ahead. What's your best guess now as to when this debacle will work its way through the system, and why did you say back in December that you weren't going to raise capital—indicating that Merrill had enough money and wouldn't need further cash infusions? What changed?

The simple answer is: The market changed. At the end of '07, we lost $8.6 billion for the year, and we raised $12.8 billion of new capital. So almost 50% more than we lost. By January we were well capitalized. Unfortunately, the world didn't stay the same. Asset values declined dramatically over the next six months. As asset prices declined, particularly mortgage-related assets, that created incremental losses and incremental needs for capital. Besides the decline in asset values, the changes included the demise of Bear Stearns, dramatic widening in credit spreads, and a tremendous lack of liquidity.