Saturday, March 14, 2009

FT: The shaming of John Thain

John Thain is giving us a tour of what is soon to become America’s most infamous office, with its $87,000 rug, $68,000 sideboard, $28,000 curtains – all part of a $1.2m redecoration scheme. This was early December, a little under two months before Thain would be fired in the same room by his new boss, Ken Lewis, chief executive of Bank of ­America.

But as the events of the next two months would show, despite what he told us that day, Thain had not been changed by his short and tumultuous tenure at Merrill. His 13 months at its helm and three weeks at BofA were to expose some blind spots. He appeared to be a man in a bubble, not good at listening to advice, and worse still at detecting changes of tone when it came to the public’s tolerance for corporate excess. Even as he mused with us over the highlights of the previous year, the ground beneath him was eroding. Flashes of arrogance and misjudgment, not to mention the insubordination of his top lieutenants from Merrill Lynch, were becoming apparent to his new bosses at BofA – who were themselves keenly aware that the old Masters of the Universe banking model was done for. John Thain’s world had changed, even if he hadn’t...

Over time, some Merrill executives started to complain – among themselves and to outsiders – about a perceived arrogance in Thain. Indeed, a cult of personality had sprung up around him during his tenure at the NYSE. Although the Big Board is tiny compared with Merrill, it occupies a disproportionately large share of the national attention when it comes to US financial markets. Thain’s success there triggered reams of glowing press reviews, including a profile in Institutional Investor magazine titled “The Adventures of SuperThain”. The hype mattered: Thain’s status helped him raise almost $20bn for a firm that had lost all credibility before his arrival. But some colleagues at Merrill felt all this had gone to his head. Shortly after arriving, Thain hired two of his closest aides from the NYSE, chief financial officer Nelson Chai and com­munications director ­Margaret Tutwiler. Tutwiler’s ­philosophy, ac­­cor­d­ing to those who dealt with her, was to promote Thain as “the public face of Merrill Lynch”. That approach grated on some subordinates, who felt that no matter how hard they worked to turn the firm around, all the glory would accrue to one man.

Top lieutenants urged him to sell as many of Merrill’s toxic assets as he could, but colleagues remember Thain dismissing suggestions from below with a curt, “No, we’re not going to do that”. Throughout the spring and summer, Thain argued – internally and to investors and regulators – that Merrill was different from Bear, that the steady stream of fees generated by its thundering herd would protect it.

By early summer, however, with Merrill’s share price continuing to fall, there was no evidence of a turnaround. Despite this, Thain didn’t seem to grasp the gravity of some of his remarks. In a conference call in June, for example, when discussing the possibility of raising capital, he mentioned that ­Merrill might sell its stakes in the Bloomberg publishing group or BlackRock. Although he had vaguely raised such possibilities before, in the context of the conference call the remark came as a shock to BlackRock’s top executives, including founder Larry Fink. Over the next few weeks, BlackRock’s share price dropped by almost 25 per cent, enraging Fink.

By mid-July, Thain had abandoned the idea of selling BlackRock, but Fink and some of Thain’s top deputies had already begun to question his authority. At one meeting, Thain would insist that the trading desk “lighten up” the balance sheet. But a week later, no action would have been taken. Or Thain would turn down a request to hire a high-profile investment banker, but negotiations with the individual would still take place. ­Making matters worse were Thain’s own high-profile hires. In the spring of 2008, ­Merrill announced that Tom Montag and Peter Kraus would join from Goldman Sachs. The size of the pair’s pay packages – $39m and $29m respectively – shocked Merrill executives who were preparing for pay cuts.

One of the key issues in the acquisition agreement concerned the payment of bonuses. By selling to BofA, Merrill’s executives knew that the days of multi-million-dollar bonus payments would come to an end. As a concession, in a non-public side-agreement, BofA allowed Merrill to pay out bonuses of about $4bn before the deal closed. Neither Lewis nor Thain realised that this small amendment to the contract would eventually spark a state investigation ­requiring them and others to testify under oath about what they knew about the payments and when they knew it.

Shortly after the deal was announced, Thain made it clear to his future employers that he expected a bonus of $40m for putting Merrill together with BofA. That number came as a shock. In a long conversation, BofA’s chief administrative officer, J. Steele Alphin, urged Thain to revise the number downwards. Alphin told Thain that BofA didn’t reward bankers simply for getting deals done, but for creating deals that worked over time. If Thain harbored any ambitions to succeed Lewis as chief executive of BofA, Alphin warned, a bonus of that size would undermine him with BofA’s board...

Thain ultimately came to an understanding with Lewis that his own bonus would be lower than that of his new boss. Presuming that the BofA chief might get as much as $10m for his stewardship of the bank that year, Thain calculated that he deserved a similar, but slightly smaller sum for himself, especially for steering Merrill clear of the bankruptcy that befell Lehman. But on the morning of December 8, the day that Merrill’s board would meet to sign off on bonuses, the Wall Street Journal published a story indicating that Thain was planning to ask for as much as $10m. That afternoon, Thain recommended that neither he nor his top executives receive bonuses for the year.

The board did agree to $3.6bn in bonuses to be paid out to other ­Merrill Lynch executives. At BofA’s request, most of the money would be paid out in cash later in the month, before the deal closed. The early payment would actually reduce expenses for BofA in 2009, ­making it easier for the bank to hit its first-­quarter numbers. Thain’s work for the year was essentially done. On December 19, he decamped with his ­family to their vacation home in Vail, Colorado, where they would spend the holidays. When the transaction closed on January 1, Thain, the 12th and final chief executive in ­Merrill’s 94-year ­history, was 1,700 miles away from the company headquarters in New York.

Before leaving for Colorado, Thain had negotiated a new title for himself: president of global banking, securities and wealth management at BofA. He would be responsible for planning and executing the merger of ­Merrill’s banking and trading business with that of BofA. In this portion of the deal, ­Merrill employees would emerge the winners, with thousands of BofA staffers laid off and replaced by their Merrill counterparts.

They had found the opportunity they’d been looking for: Thain would take the fall – for bonuses and for as much else as they could lump on him. The BofA statement was a clear sign that the end was near for Thain. But in his office on the 32nd floor, the former chief executive didn’t seem to notice. He had just purchased 8,400 shares of his new company’s stock and was finalising plans for a forthcoming trip to Davos for the World Economic Forum.

Lewis flew up to New York on January 22 to fire Thain. While he was still aboard the BofA corporate jet, the purpose of his trip was disclosed in the media, along with the damning details of Thain’s $1.2m office redesign. On BofA’s trading floor in New York, where employees were angry about what the purchase of Merrill had done to their stock, a televised image of Lewis prompted a round of boos. ­Subsequently, the news that Thain was about to be fired sparked enthusiastic applause.

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