Investment banking


Facing the Lynch mob Nov 15th 2007 | NEW YORK From The Economist print edition

John Thain has a tough job ahead as the new boss of Merrill Lynch

THE Thundering Herd has a new leader but not the one most people were expecting. On November 14th Merrill Lynch picked John Thain, boss of NYSE Euronext, the world's largest exchange operator, to replace Stan O'Neal, who walked out after the bank booked enormous writedowns on its mortgage-linked holdings.

Most had been expecting the job to go to Larry Fink, head of BlackRock, a big and successful fund-management firm of which Merrill owns 49%. Mr Fink seemed to want the job and was considered a clean pair of hands, having deftly navigated his firm around the subprime crisis. According to reports, he was approached by Merrill's search committee but was then spurned by the full board after he demanded a lot more information about the bank's credit exposures. As more of a builder than a slasher, he may also have been reluctant to take on a role that is sure to involve painful job cuts.

Mr Thain is unlikely to be so queasy. Once dubbed “I, Robot”, his soft, almost dull, exterior belies a ruthless streak. He has done a good job of shaking up the New York Stock Exchange, taking it public, expanding into bonds and derivatives, and striking big deals, such as the industry-changing merger with Paris-based Euronext and an alliance with the Tokyo Stock Exchange. He also deftly managed the demise of floor trading, grafting the NYSE onto an electronic exchange, Archipelago.

Adding to his credentials, he has already turned around a troubled institution (the exchange was reeling when he took over in 2004, after Richard Grasso was ousted because of his enormous pay packet) and he has bags of experience in the areas where Merrill is most deficient (he ran the mortgage-bond desk at Goldman Sachs before becoming the investment bank's chief operating officer). His appointment will confirm to some that Goldman, which has so far avoided big write-downs, is gradually taking over Wall Street, especially since his successor at the NYSE is its president, Duncan Niederauer, another former Goldman man.

Mr Thain might see a merger between Merrill and his old firm or another large bank as his crowning achievement before entering public service (he is believed to harbour political ambitions). Meanwhile, he has plenty of dirty work to do. Merrill's fixed-income group must be pared back, with perhaps a quarter of it going. Further write-downs may be necessary. Risk management—a discipline in which Mr Thain is said to excel—needs to be spruced up, to put it kindly. He will also have to deal with subprime-linked lawsuits and a regulatory investigation of Merrill's accounting for illiquid assets.

Above all, he must decide if the business model, with precious investment bankers and bolshie brokers under one roof, needs to be reconfigured. If Mr Thain has a weakness, it is inexperience in retail financial services—and Merrill's brokers are feeling prickly at the moment, having watched the other half of the firm dent the brand. He is at pains to play down the prospect of wrenching change. “I don't think it's an issue of deconstructing. The strategy clearly is good,” he told CNBC, a business TV channel.

Eyes will now turn to Citigroup, which is also looking for a boss after the “retirement” of Chuck Prince. Mr Thain was coy about whether he was offered that job too. Whoever ends up running Citi faces a gigantic challenge, but at least he (or she) will have plenty of latitude: Robert Rubin, the new chairman (and yet another ex-Goldmanite), has indicated that no option is off the table, even a break-up. Mr Thain may not hog the limelight for long.