Why is John Thain the right person to fix Merrill Lynch’s current woes? A lot is riding on the hope that the head of the NYSE Euronext – and former Goldman Sachs co-president – can mop up the mess from Merrill’s adventures in CDO-land.
His first major qualification is in risk. From his Goldman Sachs days he has been on both sides of this fence: he has taken risks and has also had to review risk control processes. This is Merrill’s most important priority right now. The broker-dealer’s staggering write-down on collateralised debt obligations can only be described as a failure in risk management. Mr Thain’s first task will be to reassure investors and rating agencies that under him, Merrill’s risk-taking will be appropriately sized and stress-tested. The alternative would be to retrench the trading businesses dramatically. But such a retreat would not be without its cost, in terms of earnings foregone. Furthermore, it would risk undermining areas in global markets and investment banking where Merrill has seen strong results.
Mr Thain’s other attributes are less specific but just as important. His track record at the NYSE Euronext suggests an ability to take on fiendishly complex situations. His transformation of the NYSE required him to win over the entrenched interests of the old clubby stock exchange as well as to launch a European charm offensive. Keeping Merrill’s army of brokers happy should be a sneeze by comparison. His reputation for methodical attention to highly technical detail should also reassure. Things do not get much more technical than understanding the potential for default correlations in CDOs. Convincing the market that Merrill is doing as good a job as anybody can to understand and manage its outstanding CDO and subprime related exposure could yet be Mr Thain’s biggest challenge to date. He looks well positioned to take it on.