The Failure of John Thain

Want proof that CEOs are overpaid? Just look at the mind-bogglingly awful Merrill Lynch announcement yesterday. It’s hard to know where to start: maybe the fact that Merrill is selling off $30.6 billion of CDOs to Lone Star for just $6.7 billion, of which $5 billion is Merrill’s own money. If there are any losses over and above the $1.7 billion difference, Merrill takes them, not Lone Star. Or maybe it’s the fat that Merrill valued those CDOs at $11.1 billion as of June 30. Or maybe it’s the fact that Merrill is effectively raising new money from Temasek at less than $7 a share, once you net out payments from Merrill to Temasek.

In any case, what’s utterly clear is that John Thain has lost all his credibility.

Remember January’s conference call? Thain was on top form: the worst was over, there wouldn’t be any more capital raising, assets wouldn’t be sold, and there couldn’t be any more CDO writedowns, since Merrill was putting on $23 billion of short positions against the CDOs exposures it retained.

All of Thain’s promises in January – all of them – have been broken. If it had been Stan O’Neal making the same promises, he would be the world’s biggest laughing-stock at this point; as it is, it seems he left just in time. When Thain took over, Merrill was trading at $58 a share; now it’s less than half that level.

Clearly what’s going on here is bigger than any CEO. Thain didn’t dither and make incomprehensible pronouncements; he was bold and clear about what he was doing and why he was doing it. But it didn’t help. And now even he has been reduced to the status of a jargon-spewing robot:

“The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts,” said John A. Thain, Chairman and CEO of Merrill Lynch. “Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position by issuing common stock. The actions we announced both today and on July 17 will materially enhance the company’s capital position and financial flexibility going forward.”

Don’t bother trying to find meaning in that prose, there isn’t any. As Roger Eherenberg points out, Merrill’s still being decidedly opaque on what kind of exposures it’s retaining. Over the past six months, Thain has gone from visionary to embattled and defensive, and at this point he’s no better than anybody else.

Or, to put it another way, CEOs don’t matter: if the company is going down the toilet, neither John Thain nor anybody else is going to prevent it from doing so. You could have put a monkey in charge, and the outcome wouldn’t have been materially different.

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