Merrill Lynch CEO John Thain’s decision to sell billions of dollars in bad mortgages at fire sale prices attracted the scorn of Wall Street, which saw it as an ill-time move and a departure from his previous pledge that he would not raise any additional capital. The New York Times reports that "Mr. Thain, brought in to fix the mistakes of his predecessor, is now facing criticism over his decision to raise more capital — a move that caused eye-popping dilution for Merrill’s shares."
Mr. Thain told the Times that "We have over 60,000 people working every day. All the efforts of these people were overwhelmed by the write-downs in the mortgage-related assets."
Essentially, Thain is saying that wiping the slate clean and taking a big hit now to avoid future morale-hurting problems was a necessary evil. He also argues somewhat lamely that "The buyer might have gone away. The prices of the assets might have declined." That’s true, but it’s also true of most things — and junk mortgages are about as out of demand as O-Town posters these days.
It’s easy to understand the real reason Thain made this decision: those awful investments were made back when he was working at The New York Stock Exchange. Merrill was sorely in need of new management but the downside may be that an outsider had every reason to wipe the slate clean and start fresh with his own ideas — even if that meant obtaining less value than a more orderly process might have. And he can’t really be held responsible for that because, after all, he wasn’t the one who bought that crap in the first place!
Earlier this year Jim Cramer trashed Thain as a CEO who must go, and he’s certainly facing a bit of credibility gap because of his initial insistence that the company wouldn’t do any more capital raises.
But I think it’s too soon to call for his head. Thain’s a smart guy and now he has his clean slate. Give him a few years to see what he can do — and he has no excuses now.
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Zac Bissonnette
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