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November 15, 2007

Merrill Lynch hires NYSE chief as CEO

By Greg Farrell
Looking to move beyond a subprime mortgage mess that quickly erupted into its worst crisis in years, Merrill Lynch said John Thain, head of the New York Stock Exchange, would take over as its CEO on Dec. 1.

The news ended weeks of speculation who would succeed Stanley O'Neal, who lost his job two weeks ago and at that time was the highest-profile executive casualty yet of the subprime mortgage meltdown.

Wall Street's initial reaction was good: Merrill shares rallied as news of Thain's appointment spread Wednesday, closing up $1.03 at $57.98.

In reaching outside its own management ranks for the first time in its 97-year history, Merrill named a CEO known for his expertise in risk management. Thain, 52, a graduate of MIT and Harvard Business School, spent most of his career at Goldman Sachs before taking over as CEO of the NYSE in January 2004.

The last three years, he managed the NYSE's transition from a private, non-profit organization to public company and engineered its global expansion. Prior to that, he was president of Goldman Sachs, with an expertise in operations, technology and finance.

At Merrill, Thain inherits a leading brokerage firm that recently got dragged down by the meltdown in subprime mortgages. Like most of its competitors, the firm bolstered its profits in recent years by investing in securities composed of subprime mortgage loans.

And like many on Wall Street, Merrill didn't measure the risk of those investments accurately. On Oct. 24 Merrill reported a $2.3 billion third-quarter loss because the deteriorating subprime market forced it to write down $7.9 billion - 75 percent more than it had said just weeks earlier. Six days later O'Neal resigned.

While there's no guarantee that Merrill won't have more subprime-related losses, the arrival of a risk-management expert on the scene heartened some.

Richard Bove, a bank analyst at Punk Ziegel, applauded the move, saying that most of Merrill's operations were profitable. "What's completely screwed up is risk management," he says. "John Thain's strength is that he's a cerebral guy who comes from Goldman Sachs, and he understands risk management extraordinarily well. He's exactly the right guy for the job."

Dan Tully, who retired as Merrill's chairman a decade ago, said Thain's selection surprised him. "Charlie Merrill would turn over in his grave if he knew we hired someone from Goldman Sachs," he said, referring to the firm's founder. "Let's give him a chance."

Before Wednesday, Thain had been considered to be on the short-list of candidates to replace Charles Prince, who quit as CEO of Citigroup last week following news there of up to $11 billion in subprime losses.

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