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Merrill Lynch: Thain's watershed moment

The Merrill chief’s honeymoon is over. The question now is whether he’s guilty of misjudgment or mismanagement.

Merrill Lynch’s stock price bounced nicely at the end of July, up 17% on the day following its sale to Lone Star of $30.6 billion in face value of US super-senior CDOs of ABS for just 22 cents on the dollar. Analysts applauded its bravery in taking this big hit to get out from under its most toxic asset problem rather than creeping along from one quarterly write-down to the next. Stock investors seemed relieved that a big uncertainty has been removed and the US market swallowed the biggest ever follow-on public equity offering of $8.55 billion of Merrill shares in just 15 hours.

Certainly this feels like a watershed deal that has big implications for the rest of the financial industry. But it’s hard to share the stock market’s first-day euphoria.

First of all, it raises an issue of credibility against John Thain and his newly assembled management team, including CFO Nelson Chai. Thain was brought in last December to clean up the mistakes of the previous incumbent and to improve risk management. He correctly concentrated on raising capital, bolstering liquidity and attracting senior hires.

This deal, however, marks a significant shift in his tenure at the top of Merrill.

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