New CEO of Merrill Lynch moves to clean up problems

The markets had just closed on the first Monday in December when John Thain paid a visit to Merrill Lynch & Co. Inc.'s seventh-floor bond trading room.

The company's new chief executive officer, who had been on the job for 48 hours, told the crowd a story about a phone call from David Komansky, who ran Merrill from 1997 to 2002.

"David Komansky called me up, and he said: 'I can't believe a Goldman guy is going to be in my office,' " said Thain, 52, adopting a low, gruff Bronx accent to mimic his 68-year-old predecessor. "Well, I'm not a Goldman guy anymore."

While Thain's old employer, Goldman Sachs Group Inc., emerged from the subprime crisis relatively unscathed, his new firm, Merrill Lynch, had to take a $7.9 billion write-down on its mortgage-backed assets, one that cost Thain's predecessor, Stan O'Neal, his job.

Thain, who learned risk management at Goldman and consensus building as CEO of the New York Stock Exchange, will need all of his skills to repair 94-year-old Merrill.

Thain, who has a degree in engineering from the Massachusetts Institute of Technology and an M.B.A. from Harvard University, is moving swiftly to restore order. He will create an executive committee of business heads whose members will report directly to him, he said in an interview last month. Prominent on the committee will be a chief risk officer leading a reorganized unit designed to catch the kinds of missteps that allowed the fixed-income division to drag down the firm.

"The people who were here - and who are not here anymore - did not do a very good job of managing risk," Thain said.

The CEO is also hiring senior traders, whose ranks are thin, he said.

On Dec. 24, Merrill announced it would receive a cash infusion of as much as $6.2 billion from Singapore's Temasek Holdings Pte Ltd. and New York-based Davis Selected Advisors L.P. Both investors will pay $48 a share.

Thain and his team must begin by cleaning up Merrill Lynch's balance sheet, digging out whatever subprime-related losses are left on the company's books, said Charles Peabody, an analyst at New York-based Portales Partners L.L.C. That could mean an additional $11.5 billion in Merrill write-offs related to mortgages, according to William Tanona, an analyst at Goldman Sachs.

Thain's toughest task may be to revive a corporate culture that was damaged under O'Neal, said Barry Friedberg, a former chairman of global markets and investment banking. O'Neal, 56, sliced more than 18,000 jobs and closed 250 Merrill Lynch offices when the economy faltered in 2001 and 2002.

"Stan was unique in his capacity to drive away talent," said Friedberg, 67, who left Merrill in 2003 after 19 years. "O'Neal's principal legacy is not the mortgage loss but the loss of hundreds of outstanding people."

O'Neal declined to comment for this article.

Thain, Merrill Lynch's first CEO from outside the company, will be keeping constant track of the new risk-management system to avoid any repetition of the subprime-mortgage debacle.

As chief financial officer at Goldman Sachs from 1994 to 1999, Thain, the son of a doctor from Antioch, Ill., worked with his team to put together a checks-and-balances risk-control system that's still in place, he said. It includes a group of committees that watch over each other.

"At Goldman, there was an equal balance between the traders and the risk managers, and there was actually a very good dialogue," Thain said. "And when you add into that the involvement of senior management, it works."