We'll get to who is to blame in a minute, but first, a look at the latest bad news that has come on his watch.
Last week, a market that was fully expecting bad news from Merrill braced for grisly after-market quarterly results. The brokerage Merrill Lynch & Co. was supposed to take a big write-down of $4.5 billion to $6 billion. The loss was supposed to be near $1.91 a share, according to consensus estimates.
When the financials hit the wire Thursday, the results were much, much worse: $9.4 billion in write-downs, trading losses, a loss of $4.65 billion. The final blow was that not only had Merrill agreed to raid part of its rainy day fund -- a 20% stake in data provider Bloomberg L.P., to raise $4.5 billion in capital -- it would sell another subsidiary, Financial Data Services, for $3.5 billion.
When Thain agreed to become chief executive eight months ago, he knew there was going to be trouble, but this much? Though Citigroup Inc. had turned in bigger losses and write-downs by dollar amount in the past, its balance sheet is more than twice the size of Merrill's. In other words, Merrill is arguably the most battered firm in business since the banking crisis took hold. It has lost $19.2 billion during the last year, and Moody's Investors Service estimates Merrill could be on the hook for another $10 billion pre-tax write-downs. More than 4,000 employees have lost their jobs.
What's gone wrong
Thain, 53, who won kudos as head of the New York Stock Exchange and earned a reputation as "Mr. Fixit," wants to put the blame squarely on his predecessor. Thain has been reminding the market that these problem assets are so-called legacy assets in that they are assets accumulated under former CEO Stanley O'Neal.
"I did not create these CDOs," he said on a conference call.
Thain has also suggested that people are making too big a deal about the asset sales. "We have $1 trillion [on our] balance sheet. There are in fact other options. You guys never heard of FDS, and there are other options on our balance sheet."
He's right. Still, Thain has made a couple of missteps and therefore should accept some of the
responsibility for Merrill's misfortunes.
OK, Merrill didn't. It sold $8 billion in assets instead. Thain's biggest mistake may be the promise he made to foreign investors not to dilute their stakes when they pumped $15.5 billion into the balance sheet. Merrill would have to pay them cash or stock, if Merrill sold stock. This has kept Merrill from issuing new stock and looking around the store for things to sell.
The wrong job
Speaking of Citigroup, how is Thain feeling about his decision to bypass the big red umbrella in favor of Mother Merrill? Late last year, Citigroup was struggling to deal with its $58 billion in struggling structured investment vehicles and $20 billion in coming write-downs. When Vikram Pandit was tapped to become chief executive Dec. 11, Citi was the worst performer among the 30 companies that made up the Dow Jones Industrial Average.
Back in December, I wondered if the expectations of Thain and the lack of them of Pandit would influence their legacies
Since he took the job at Merrill, shares have fallen 45.3%; Citi shares have fallen 42.7%. Merrill has six buy, or strong buy, recommendations and three sell recommendations. Citigroup has six buy, or strong buy, recommendations and three sell recommendations, according to ThomsonReuters and FactSet Research
Neither company is getting a pass from analysts. Citigroup, which is mostly a bank, has exposure to a deteriorating consumer credit market, according to a report published Friday by Standard & Poor's Equity Research. Merrill Lynch, which is mostly a brokerage, is facing bear market territory.
"This company's earnings power has been severely compromised," Ladenburg Thalmann analyst Richard Bove wrote Friday. "Even though it now has exemplary management it could take years for the firm to recover."
Maybe by then the Citigroup job will open up again.
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