The Wall Street Journal-20080118-Merrill-s Risk Manager- New Chief John Thain on What Led to the Losses And Why He-s Hiring Goldman Sachs Executives
Return to: The_Wall_Street_Journal-20080118
Merrill's Risk Manager; New Chief John Thain on What Led to the Losses And Why He's Hiring Goldman Sachs Executives
New York -- John Thain arrived at Merrill Lynch & Co. just 47 days ago. Since then, the former NYSE Euronext chief executive officer has raised $12.8 billion in capital from places as far away as Japan and has hired a number of key executives, including the former risk czar at Goldman Sachs Group Inc., a firm where Mr. Thain was once president, and the chief financial officer at the NYSE.
Yesterday, Mr. Thain presided over the largest loss in Merrill Lynch's 94-year history as bets the brokerage firm made on the mortgage market long before he arrived came home to roost. Despite his efforts, Merrill's stock took a beating, down $5.64, or 10%, to $49.45 on the New York Stock Exchange.
In a 30-minute interview in his office on the 32nd floor of Merrill Lynch's downtown headquarters, Mr. Thain said he hopes the worst is behind Merrill and it has written down many of the money-losing mortgage positions that got the firm in so much trouble.
"I didn't cause this problem," he said, but hopes over time the steps he has taken will right the firm.
Excerpts from the interview:
Wall Street Journal: When you arrived, did you think that maybe you would have to sell Merrill Lynch?
Mr. Thain: Never.
WSJ: Is a merger with a bank in the cards for the firm?
Mr. Thain: No. We have a great mix of business, and all you have to do is look across the way at our friendly other competitor, which is a bank and an investment bank combined, to see that they are having huge problems.
WSJ: Risk management is a priority for you. How was it being handled before your arrival and how does it work now?
Mr. Thain: There were at least two major problems. One was that credit risk management was separate from market risk management, and that doesn't make sense, because they are both permutations of the other. We are combining market and credit risk. We are hiring Noel Donohoe, who actually came from Goldman Sachs and ran Goldman's risk for 10 years. He and Ed Moriarty will run the overall risk functions and will report directly to me, so that emphasizes the importance of risk management in the organization.
Merrill had a risk committee. It just didn't function. So now when we have a weekly meeting, the head of fixed income and equities show up. I show up, and the risk heads show up. It functions and functions across the businesses.
WSJ: This sounds a lot like how Goldman handles its risk operation. Are there any other Goldman practices you plan to emulate?
Mr. Thain: The other practice I plan to implement is Goldman's management-committee structure, where the leaders of the different businesses who run the firm meet once a week. And the other is broadening out my reporting structure so there are more direct reports reporting directly to me.
WSJ: A number of brokerage houses are courting Tom Montag, the former co-head of sales and trading at Goldman Sachs. Do you think you will be able to hire him?
Mr. Thain: He is a very popular guy. I can't speculate on my chances, but I am hopeful he will join us.
WSJ: Are you getting pushback from inside Merrill for hiring too many Goldman alumni?
Mr. Thain: I am not bringing in that many people from Goldman or anywhere. But I need more senior trading talent. Tom Montag is not the only guy. He is just a particularly good one.
WSJ: Over the past year, a good piece of Merrill Lynch's business has gone away. How will the firm deal with that?
Mr. Thain: When you say a lot of the business has been erased, it is really only a small part of the business inside Fixed Income, currencies and commodities. Wealth management is going great. We had a record year in investment banking. Equity business had a record year. I think Merrill Lynch is known for its client focus and its wealth management businesses. We are still going to have a trading component to our business, but it is not going to be of the same nature.
WSJ: Is the worst now behind you?
Mr. Thain: This problem is not a zero, but it is for the most part behind us.
WSJ: You are heading to Moscow next week. Will the firm's international operations be more of a focus now that you have begun to get your house in order here?
Mr. Thain: There are great growth prospects for us, primarily for us in the 'BRIC' countries, Brazil, Russia, India and China, and the Pacific Rim. We have to focus on China because we are not where we need to be. We need a license in China. We are behind.
WSJ: Merrill made a big push to expand globally in the 1990s and then retreated after losses in countries like Japan and Canada. How are you going to do it differently?
Mr. Thain: The growth prospects outside the U.S. are actually better than in the U.S., and there is no reason why we can't do it profitably.
WSJ: It must be pretty exciting to come in and run a firm like Merrill. What has surprised you most about the firm?
Mr. Thain: The thing that has been the biggest surprise but also the biggest positive is this place has a great culture. I was down yesterday in Arizona in front of 700 leaders on the wealth-management organization, and that group, they are longtime employees, they love Merrill and are incredibly optimistic and enthusiastic about their business.
WSJ: What shocked you the most when you arrived at Merrill in early December?
Mr. Thain: Two things. One was the lack of understanding of the risk in these positions and the lack of balance-sheet control. The balance sheet really got out of control, and traders were able to put on positions that were way too big, and I don't there was a good understanding of what the risk was.
