Merrill shakes off $9.8B loss
On the same day Merrill reported a fourth-quarter loss of $9.8 billion due to bad bets on subprime mortgage investments, Thain sounded upbeat Thursday about the company's prospects in a conference call with analysts and in a subsequent interview.
He pointed out that Merrill has raised more than $12.5 billion from sovereign wealth funds in recent weeks, and expressed confidence that the worst of the subprime-related losses was over.
"We raised the capital that we need to go forward," he said in a phone interview. "We maintained our (credit) ratings, and now we're looking to the future of the enterprise, the earnings power of enterprise, and not to dealing with this anymore."
Merrill's fourth-quarter loss matched the one Citigroup reported earlier this week, and like Citigroup, Merrill's stock took a beating after the announcement, dropping 10 percent to close at $49.45.
Over the past year, Merrill Lynch stock has dropped about 50 percent from its high. The brokerage firm's fourth-quarter loss produced a full-year loss of $8.6 billion, the first time in decades that Merrill finished a year in the red.
Merrill recorded close to $17 billion in special charges, one-time markdowns of assets on its balance sheet. The bulk of those charges, $11.5 billion, stemmed from subprime mortgage investments gone sour, and another $3.1 billion on subprime hedging activities that backfired.
Obscured by the losses were strong performances in some of Merrill Lynch's core businesses. For the full year, revenue in equity markets and investment banking broke the previous year's records, and pretax profits in global wealth management jumped 41 percent.
Noting that Merrill Lynch stumbled into its subprime problems because of poor risk-management programs and trading practices that weren't well supervised, Thain said the new heads of risk management and trading would report directly to him.
Under Thain's predecessor, Stanley O'Neal, executives in those positions did not report to the CEO. O'Neal was forced to resign in October, following Merrill Lynch's admission that subprime-related losses would be much greater than anticipated.
A few weeks later, Thain left his position as CEO of the New York Stock Exchange to take the top job at Merrill. Prior to joining the NYSE, Thain had been president of Goldman Sachs.
Now, Thain acknowledged Thursday, he's attempting to bring to Merrill practices he learned at Goldman. His objectives: Bring more accountability to risk management and make all managers responsible for the profitability of the firm as a whole.
"I don't want to get out of the business of risk taking," said Thain. "I just want do it better, size it properly, manage it, and make sure that our risk exposures are well understood and don't jeopardize the earnings of the business or whole company."
Thain also said that Merrill Lynch would change its compensation policies. No longer would bonuses be awarded on the basis of individual performance and whether a department had met its numbers. Going forward, Thain said, all compensation would be based on the profitability of the firm as a whole.
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