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Financial Times, January 26, 2009 column


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John Thain  

Even at the end, after presiding over the worst performance in the 94-year history of Merrill Lynch, and as Bank of America pinned the blame for a bonus payment scandal squarely on his back, John Thain did not seem to know what was about to befall him.

Last Wednesday, Mr Thain (pictured above) purchased 8,400 shares in BofA, which had just rescued his company, and was finalising plans to jet off to Davos, where he would hobnob with members of the global business elite. But on Thursday morning, it was Ken Lewis, BofA chief executive, who hopped on a jet for a short flight from Charlotte, North Carolina, to New York, where he confronted Mr Thain in his corner office and dismissed him.

Just like that, in a meeting that was over in 15 minutes, the high-flying Wall Street career that Mr Thain had spent three decades constructing came to a crashing end.

Named chief executive of Merrill Lynch in November 2007, Mr Thain took over a legendary investment bank that, in common with the rest of Wall Street, had fallen on hard times since the credit crisis hit that August. His mission was clear. Based on his record both at the rival Goldman Sachs, where he had been president, and then as head of the New York Stock Exchange, his nickname “Mr Fix-it” made it appear likely he would excel at the job and perhaps earn a place in the pantheon of Wall Street titans who had secured the future of great institutions.

His analytical mind, sharpened at MIT and Harvard Business School and proven through executive experience in finance, could grapple with many of the thorniest business challenges. But Mr Thain had been reared on a market that always rebounded from downdraughts. For 25 years, his one frame of reference was a world in which banks could keep lending, investing and growing. Yet when it began to become clear they could not, he seemed to have hit on the best possible solution: shelter under the wing of the largest US bank, with its broad operating base and bountiful retail deposits.

After taking on the clean-up job at Merrill, he was hardly alone in failing to fathom how bad 2008 would be. Bear Stearns collapsed in March from a lack of liquidity and was forced into a sale to JPMorgan Chase. But in the second quarter, the world appeared to return to normal.

Subordinates including Greg Fleming, head of investment banking, encouraged him to sell the group’s toxic assets – subprime mortgage securities and the like – in April and May. But Mr Thain would not budge on the issue until late July, when the market for such assets had eroded even further. So if there is one signature achievement to his barely year-long tenure at Merrill Lynch, it was his decision to sell the group to BofA over the weekend of September 13-14, as Lehman Brothers was desperately seeking a government bail-out. By Monday September 15, Lehman had filed for bankruptcy protection and Mr Thain had inked a sale agreement at $29 per share, a 70 per cent premium over the price at which Merrill stock had been trading at the previous Friday. The deal valued the brokerage at $50bn.

A cool, calculating analyst who ‘didn’t see the massive bubble’

John Thain rose to power – first at Goldman Sachs, then the New York Stock Exchange and, finally, Merrill Lynch – with a reputation as Wall Street’s ultimate technocrat, a cool operator who could quantify risks and avoid mistakes, writes Henny Sender.

He joined Goldman after studying electrical engineering at MIT and earning a graduate degree at the Harvard Business School. Trim and athletic, with an unassuming midwestern mien, Mr Thain became known at Goldman for his steely intelligence, rising under Jon Corzine, then chief executive, to become chief financial officer before he was 40.

“He was calculating and logical,” one member of Goldman’s management committee remembers. “He analysed everything.” Mr Thain, now 53, also earned a reputation with some colleagues for ruthlessness. During a power struggle that developed as Goldman considered going public in the 1990s, Mr Thain turned against Mr Corzine, his mentor, to help Hank Paulson emerge as the firm’s top boss. When Mr Thain became chief executive of the NYSE in 2004, his icy demeanour became the stuff of New York legend. Traders, it was said, referred to him as “I, Robot”.

For Merrill, however, this all seemed like a good thing. A company so bathed in sentimentality that its executives called it “Mother Merrill”, the bank turned to Mr Thain in late 2007, hoping that his brain power would help it survive the huge losses incurred under Stan O’Neal.

Mr Thain moved quickly at Merrill, raising capital in December 2007 from investors including Singapore’s Temasek Holdings and again in January 2008 from Japan’s Mizuho Financial, the sovereign wealth arms of Korea and Kuwait, the New Jersey state pension fund, the Olayan group of Saudi Arabia and TPG-Axon, the hedge fund affiliate of the large private equity firm.

In July 2008, Merrill Lynch struck a deal to sell toxic assets with a face value of more than $30bn to Lone Star Funds, a distressed debt investor, receiving 22 cents on the dollar. Wall Street breathed a sigh of relief, hoping that Mr Thain was clearing the desks for a rebound.

But it was not to be. Like so many others on Wall Street, Mr Thain proved unable to keep up with the speed of the collapse. In a December interview with the Financial Times, Mr Thain acknowledged that at the time he had taken over Merrill, “I didn’t see the massive bubble.”

The times changed too quickly even for the robot of Wall Street. One major Merrill shareholder mused: “John Thain of Goldman would have fired the John Thain of Merrill.”




How things went sour

● Nov 2007: John Thain becomes Merrill Lynch chief executive

● Sept 13-15 2008: Agrees deal to sell Merrill to Bank of America

● Dec 8: Merrill board approves $4bn in bonuses to employees

● Dec 17: BofA’s Ken Lewis asks federal government for $20bn infusion

● Dec 29: Merrill pays the cash portion of its bonuses; remainder paid out in BofA stock on Jan 2

● Jan 16: BofA discloses $2.4bn fourth-quarter loss – dwarfed by a pre-merger loss of $15.3bn by Merrill

● Jan 22: Merrill’s accelerated bonus payments revealed by the Financial Times. Lewis dismisses Thain



What went wrong since then and why? Accounts by those who know Mr Thain point variously to blind spots in attuning himself to differences in corporate culture, to the mood outside downtown Manhattan and simply to people. For a start, though analytical power was his strong suit, at an institution such as Merrill Lynch people skills are paramount. “Merrill has a way of being very hard on outsiders coming in,” says Thomas Caldwell of Caldwell Financial in Toronto. “It’s a unique culture. If you come in as an outsider, you’d better be paying attention, because it’s a tough game.”

Mr Caldwell, who worked at Merrill in the 1970s, came to know Mr Thain in 2004 when the ambitious Goldman Sachs executive took the stock exchange helm. At the time, the NYSE was reeling from a pay scandal involving Richard Grasso, his predecessor, as well as a Securities and Exchange Commission probe into the dealings of specialist brokers. Mr Caldwell, who owned more than 40 of the exchange’s 1,366 seats, watched Mr Thain guide the NYSE through its regulatory woes, transform it into a public company, modernise its trading platform and globalise by acquiring the Paris-based Euronext.

His disagreements with Mr Thain were many, but Mr Caldwell says he respected Mr Thain’s professionalism and his penchant for deliberating over problems before acting. He says he is saddened by what he calls a “character assassination” taking place in the aftermath of Mr Thain’s firing, highlighted by the disclosure last week that Mr Thain spent more than $1m to decorate his corner office at Merrill last year.

But after 13 months during which Mr Thain evidently crossed, belittled or antagonised subordinates at Merrill and then at BofA, one more pertinent question might be whether there was anyone left in upper management who did not cheer his ousting last Thursday. Another is whether he was indeed, as portrayed, the visionary architect of September’s deal with BofA. According to several executives involved in the matter, Mr Thain had to be forced into those negotiations by Hank Paulson, then Treasury secretary and his old boss at Goldman.

Late on Saturday morning September 13, as Wall Street’s most prominent bankers met at the New York Federal Reserve to hatch a rescue plan for Lehman, Mr Thain says it dawned on him that Lehman would not be rescued, so he called BofA’s Mr Lewis to initiate talks. But several people present say Mr Paulson first took him aside and gave him a stern talking to. These witnesses, who represented different parties in the talks, add that it was only after Mr Thain returned from his one-on-one with Mr Paulson, looking somewhat shaken, that he placed the call to Mr Lewis. Asked about the conversation with Mr Paulson, Mr Thain characterises things differently. The Fed and Treasury “were initially focused on Lehman but grew concerned about us”, he told the Financial Times last month. “They wanted to make sure I was being proactive [but] they didn’t tell me to call Ken Lewis.”

Compared with Richard Fuld of Lehman Brothers, who became the avatar of wrongheaded Wall Street leadership last year for failing to save his firm, Mr Thain emerged from the gruelling September weekend not only unscathed but with his reputation as a miracle-worker enhanced. In early October, he ended speculation about his future by accepting a position as head of global banking, securities and wealth management at BofA, reporting directly to Mr Lewis and positioning himself as a candidate to succeed the BofA boss.

But Mr Thain’s embrace of his role as Merrill’s saviour and his reluctance to spend time in Charlotte with his future colleagues generated simmering enmity within BofA. The tension boiled over on December 8, three days after Merrill shareholders had voted to approve the BofA acquisition, when Merrill’s board of directors met to sign off on the annual bonuses the investment bank was to pay. In the weeks leading up to that meeting, Mr Thain put together an argument for a bonus for himself of more than $35m, says someone with knowledge of the situation.

Other princes of Wall Street, starting with the top executives at Goldman Sachs, had publicly forsworn their bonuses for 2008 because of poor market conditions and public uproar over the US government’s $700bn bail-out for the financial industry. But by comparing Merrill’s successful sale with the collapse of Lehman and Bear Stearns, Mr Thain concluded that he deserved a big payday, according to the executive familiar with the situation.

Mr Thain’s plan was exposed in the Wall Street Journal on the morning of the meeting. That afternoon, he told the board he did not want a bonus. But the board approved close to $4bn in incentive compensation to many others among the 58,000 Merrill employees.

According to BofA, Merrill’s performance deteriorated that week, prompting Mr Lewis to approach the federal government on December 17 for an additional infusion of $20bn in order to complete the acquisition. Mr Thain appears to have been unaware of Mr Lewis’s reservations. Instead, a week before Christmas, as BofA’s auditors were poring over Merrill’s books, Mr Thain left for three weeks at his vacation home in Vail, Colorado. On December 29, Merrill paid the cash portion of its bonuses – 70 per cent of the $4bn set aside – to its employees. On January 2, the remainder was paid out in BofA stock.

That came the day after BofA’s acquisition of Merrill Lynch closed. Mr Thain then launched a plan to reduce headcount in investment banking, capital markets and research by almost 40 per cent. But the brunt of redundancies would be visited on BofA employees.

On January 16, after Mr Lewis’ December plea for government help was revealed, BofA disclosed an attributable loss of $2.4bn for the fourth quarter. But that sum was dwarfed by Merrill’s pre-merger loss of $15.3bn. For the year, Merrill was $27bn in the red. Nonetheless, Mr Lewis told analysts he was “happy” that Mr Thain had decided to stay on. BofA’s share price continued to swoon and internal animosity towards Mr Thain raged.

BofA employees grumbled that the acquisition of Merrill had devastated their 401(k) retirement accounts, which were padded with company stock, as well as ruining their bank, which was now a “ward of the state”, and costing them jobs as the merger led to a big cull. Most galling to BofA staff was the $4bn paid to Merrill employees, just as the transaction closed, using money that appeared to come directly from US government funds.

After the revelation of those bonus payments in the FT last week, Andrew Cuomo, New York’s attorney-general, launched an investigation. Mr Lewis, toasted as “banker of the year” by American Banker the previous month, was now the target of criticism from shareholders and analysts. On Wednesday, BofA issued a statement to the FT laying responsibility for the December bonus flap squarely on Mr Thain. To executives schooled in the language of corporate pronouncements, usually contrived to avoid the assignment of any blame, BofA’s statement was a clear indication that the end was near.

Executives at BofA headquarters in Charlotte knew Mr Thain’s days were numbered. At Merrill Lynch it was also apparent that his reign was nearing an end. But on the 32nd floor of Merrill’s headquarters, Mr Thain was among the last to see it coming.




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