Merrill: Thain to the Rescue


In a surprise move, the former Goldman executive is heading to Merrill Lynch to help clean up the troubled brokerage firm

In a surprise development, NYSE Euronext (NYX) chief John Thain is heading to ailing brokerage giant Merrill Lynch (MER) to take over the roles of chairman and chief executive.

Some industry executives had expected Thain to head to Citigroup (BusinessWeek.com, 11/2/07) (C), the other major financial institution with a chief executive officer vacancy. Larry Fink, the chief executive of asset manager Blackrock (BLK), had been expected to take the top post at Merrill, which owns 49.8% of Blackrock.

On Nov. 14, however, after the stock market closed, Merrill made it official. "John Thain is the right person to become the [new chief of Merrill]", said Alberto Cribiore, the firm's non-executive chairman and head of its search committee, in a statement.

Back to Its Roots

"I am excited and honored to have the opportunity to lead such an outstanding organization," said Thain. "I am certain that together we can continue to grow Merrill's global business and add value to our customers and our shareholders."

The question now is whether Thain, the first outsider CEO in Merrill's 93-year history, can bring stability back to the embattled firm. Merrill ran into trouble as it ventured from its brokerage roots, particularly when it went into proprietary trading that proved treacherous as the credit markets seized up in recent months. One key question will be whether Thain guides Merrill back to concentrating on those roots or whether he tries to fix the deep problems in the proprietary trading operation.

Thain's long tenure at Goldman Sachs (GS) suggests to some analysts that he's inclined to push Merrill to be more like Goldman, a firm that has profited greatly from trading for its own account. But Win Smith, a former chairman of Merrill Lynch International and a son of one of the firm's founders, says Merrill need not try to be another Goldman. "It appears Merrill was taking more proprietary risk, creating the problem we have today," said Smith, who now runs the Sugarbush ski resort in Vermont.

Executive Musical Chairs

The recent executive suite version of musical chairs has been brought on by the crisis in the credit markets. Finance firms have piled up billions in losses as securities with subprime exposure have tumbled in value. On Oct. 30, Stanley O'Neal, Merrill's chief executive, resigned after the bank said it would take an $8.4 billion writedown (BusinessWeek.com, 10/30/07).

Then on Nov. 4, Charles Prince, Citi's CEO, stepped down as the company (BusinessWeek.com, 11/5/07) said it would have to take $8 billion to $11 billion in charges in the fourth quarter, after the $6.5 billion writedown it took in the third.

Thain, 52, is one of just a handful of Wall Street executives with experience in running a large, global organization. He's a past president of Goldman, a reliable profit machine that has come through the credit crisis with less damage than its peers (BusinessWeek.com, 9/20/07). As CEO of the NYSE, he merged the exchange with European rival Euronext, and steered it into the digital era by acquiring Archipelago Holdings, an electronic exchange. He has a bachelor's degree in engineering from MIT and an MBA from Harvard.

Thain Thwarted By Citi Insiders?

Investors were pleased with the news, with Merrill shares rising 1.6%, to $57.86. The Wall Street Journal and New York Post first reported Thain's appointment on their Web sites on Wednesday.

There was some speculation that Thain's opportunity at Citi was thwarted by insiders at that bank, including Vikram Pandit, the head of alternative investments. "It's a big political fight," said Charles Smith, lead-manager of the Fort Pitt Capital Total Return Fund (FPCGX) which currently owns about 500,000 Citi shares. Citi spokespersons weren't immediately available for comment.

The tasks ahead for Thain at Merrill and for whoever ends up running Citi are similar, according to Smith of Fort Pitt. He said neither institution can expect the growth driven by the explosion in the mortgage markets to continue. From now on the job will be reducing costs and tapping into fee-based businesses such as asset management and transaction services. That can be a good business, according to Smith. Merrill has the largest network of brokers in the country. For some investors, the key to Merrill's future will be striking a balance with its past.

Rosenbush is a senior writer for BusinessWeek.com in New York.

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