Abigail Hofman: Thain's honeymoon is over

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I hate to be the ugly fairy at the wedding but I'm starting to wonder if John Thain will turn out ot be Merrill's messiah after all.

by Abigail Hofman

Abigail's biography
“Rosey,” I wrote. “Things are so bad out there that I can’t open the Financial Times in the morning without a bottle of vodka by my side.” “Pour me a glass,” responded David Rosenberg, Merrill Lynch’s chief North American economist. Rosenberg is one of Wall Street’s biggest bears and thus I have nicknamed him Rosey. However, charming, convivial and highly intelligent Rosenberg has also been right – at least for the past year. I spoke to him in June 2007 as markets were frolicking ever higher; Citi’s former CEO, Chuck Prince, was still dancing; and Bear Stearns’ hedge funds were starting to unravel. I confessed that I was more pessimistic than Cassandra herself. David was a kindred spirit: “I never trust market highs when bank shares lag,” he said.

Just over a year later, in July 2008, I was in New York and went down to Merrill’s World Financial Center headquarters to meet Rosenberg. And I can report that Rosey is still gloomy. “When will it end?” I pleaded, panic rendering me incoherent. Rosenberg looked across his desk, piled high with papers and pamphlets. “When will what end, Abigail?” he queried benevolently. “The housing downturn, the credit crunch or, most pernicious, the consumer recession? America is behaving more like Japan than I envisaged,” he continued. “I thought we would get a more aggressive Fed response. And as for Congress, temporary tax cuts are like using a band-aid to cure cancer! There is no quick fix for sorting out the issues with financial and consumers. And, despite the current short-term inflation scare, I consider that we’re heading into a very deflationary environment (a weak labour market, excess capacity and a contraction in credit). The US recession started in January 2008. The official numbers we have at the moment will all be revised down: negative GDP growth lies ahead and there is no bottom in sight for the housing market. The stock market may find a bottom this autumn but downturns take three to four years to work themselves out and it’s going to feel bad for a while. Our advice to clients remains: own high-quality bonds and be defensively selective in the equity markets (avoid financials and consumer discretionary stocks).” Rosenberg concluded our conversation in his normal cheery fashion: “Most people under the age of 40 are in shock, Abigail. For them this environment is like seeing an unidentified flying object.”


In New York, I also met Larry Fink, chairman and chief executive of asset management firm BlackRock. Fink who started his career at First Boston and is widely credited with developing the first collateralized mortgage obligation, founded BlackRock in 1988. BlackRock was originally part of Blackstone. The name shows that you can be a top financier and still have a sense of humour. In 1995, the stone and the rock separated; PNC, a regional bank, purchased BlackRock and in 1999 BlackRock went public. The firm now manages $1.4 trillion in assets and has made a profit in the past four quarters. BlackRock Solutions is its highly regarded risk management platform, which has been retained by both the Federal Reserve and UBS to value sub-prime portfolios. I asked Fink why he thought he had been so successful. He answered my question on two levels. BlackRock has a client-centric business model (although most financial institutions would claim that) and a powerful one-team business model, which means that it only uses one brand name and has one technology platform. On a personal level, he insisted: “I still work harder than ever, I’m still in the office at 6.15 in the morning, I still visit clients continually and I’m just as paranoid today as I was 20 years ago.”

BlackRock is no longer related to Blackstone but it is related to Merrill Lynch. In February 2006, BlackRock and Merrill announced that Merrill would merge its investment management business with BlackRock to create a new asset management firm. Merrill took a 49.8% stake in the new entity, which retained the BlackRock name. This was a smart trade for Merrill as Merrill was effectively acquiring half of a leading asset manager at an affordable price by using the currency of its own asset management business (which had a higher implied P/E multiple than the broker/dealer itself). The BlackRock deal made a lot of sense: it gave Merrill a significant position in asset management, which in turn had synergies with Merrill’s brokerage business.

John Thain is a forced seller of assets. This is not a good place to be. He has rummaged around in grandma’s closet to see what gems he can find to pawn and come up with several potential gems

John Thain is a forced seller of assets. This is not a good place to be. He has rummaged around in grandma’s closet to see what gems he can find to pawn and come up with several potential gems
Fast forward two and a half years, and at Merrill former Goldman Sachs president John Thain has taken over as chief executive from Stan O’Neal. Merrill has written down more than $40 billion on sub-prime debt, leveraged loans and hedges with bond insurers. As sovereign wealth funds become less enamoured of loss-making western financial institutions, Thain is a forced seller of assets. This is not a good situation to be in. He has rummaged around in grandma’s closet to see what jewellery he can find to pawn and come up with several potential gems. He has sold Merrill’s 20% stake in Bloomberg back to Bloomberg Inc and is looking to offload a controlling interest in Financial Data Services. But it looks as if the stake in BlackRock (valued at about $14 billion) will stay. I am sure that Merrill looked at reducing its BlackRock stake but was unable to pull this off. Unfortunately for Thain, the rating agencies consider that the asset manager is now a core part of the Merrill franchise. I would have loved to be a fly on the wall at the negotiations between Fink and Merrill’s president, Greg Fleming. Fink knew Merrill was in a weak position. Fleming knows Fink extremely well as in the past he has been his investment banker and Fleming negotiated the BlackRock deal on behalf of Merrill in 2006.

In December 2007, Thain was trumpeted as the saviour of Merrill. A Merrill board member gloated to me: “We were so lucky to get him, Abigail.” I hate to be the ugly fairy at the wedding but I’m starting to wonder if Thain will turn out to be Merrill’s messiah after all. Although he has hired several former colleagues (such as Noel Donohoe and Nelson Chai), the engine room of the securities business is leaderless until Tom Montag joins as head of sales and trading in August. So it is amazing that the rates and currencies division produced record first-half revenues. Investment banking under the delightful Andrea Orcel also did well, contributing more than $1 billion in second-quarter revenue. This July, Merrill Lynch was named Euromoney’s global M&A house for 2008.

Montag left Goldman last December and comes in to Merrill on a dream package worth nearly $90 million (whoever said the credit crunch would puncture banking compensation?). Monty (whom a source describes as gloriously unconventional, arriving for dinner in Tokyo on a Vespa and wearing a pink T-shirt), might be good but is he that good? And my guess is he will hire more Goldman people, which in turn will alienate existing Merrill employees. “It’s tough to impose a Goldman-type culture on a brokerage organization,” a source mused. “It would probably mean changing the commission structure, which could be disastrous.”

Thain probably has one more card up his sleeve: he might be able to sell some of Merrill’s private equity portfolio, which is rumoured to be robust. But ultimately can an independent investment bank survive in this new era of less leverage, greater regulation, high volatility and mediocre returns on equity? My gut feeling is that when Thain ascended the Merrill throne, he hoped to drastically write down assets, blame the previous management, stabilize the ship, perhaps achieve some write-ups and then sell the firm, leaving him free to ride off on a white charger to join president John McCain as US Treasury secretary. Things are not going to plan however. Not least since Barack Obama will probably win the election. I don’t rule out the possibility that Bank of America might buy Merrill but the honeymoon is over for Thain. Nine months in to the job, he has to stand up and take the blame or credit for what is happening at Merrill.


Someone for whom the honeymoon is about to begin is the ethereal Erin Callan, Lehman Brothers’ former chief financial officer, who was hired by Credit Suisse in mid-July. I wrote about Callan in my July column and chided her for an abundance of media appearances. Shortly after the column was published, I received a waspish email from a senior Wall Street banker: “A little rough on Erin surely? She was probably just doing what Lehman asked her to do. You know that!”

On reflection, it might be that Erin – articulate and smart as she is – was in the wrong role. I once worked for a man who went on to be an excellent finance director of a top international bank. My former boss was a bruiser and a pedant who inhaled detail through every pore and was in his element debating footnotes to five-year stretch target budgets. Erin does not strike me as that sort of person. In fact, when I watched a video of the CNBC interview she did after the release of Lehman’s 2008 first-quarter results, there was a doe-like fragility to her that made comely Maria Bartiromo (who was interviewing her) appear like a cuddly Italian grandmother.

I am intrigued by the Erin timeline. She started as Lehman CFO on December 1 2007 and she stepped down this June 12, although she remained at the firm in an unspecified capacity. A brief four weeks later, Credit Suisse announced that Callan would join its investment bank as head of its global hedge fund business. “That’s a quick turnaround,” a mole mused. “Usually it takes months to define these senior jobs.”

Callan is cut from tougher cloth than I am. If I had been through what she had been through (and don’t forget, she must have had a lot of Lehman stock that has swooned in value), I would have taken to my bed for at least a month. I would only emerge from under the duvet to refresh my tumbler of vodka before collapsing back onto the pillows and wailing: “David Einhorn, David Einhorn.” Einhorn was the heartless hedge fund manager who locked horns with Callan over the value of certain assets on Lehman’s balance sheet. Of course, Callan knows Rob Shafir, head of the Americas at Credit Suisse, well. Shafir used to work at Lehman; so perhaps that made the decision to move from Seventh Avenue to Madison Avenue easier.

Nevertheless the Credit Suisse press release is tantalizingly vague about exactly what Erin’s new responsibilities will be and who will report to her, merely stating that: “Ms Callan will spearhead Credit Suisse’s strategic advisory and coverage efforts serving the hedge fund community. She will partner and co-ordinate closely with the businesses that support the bank’s hedge fund clients...” Mole again: “She will have to carve out a role for herself. She will either sink or swim.” I am convinced that Callan will do well at Credit Suisse and do well for Credit Suisse. I look forward to meeting her in due course.

So, farewell Michael Klein. I have been ruminating about Klein’s departure from Citi ever since Vikram Pandit seized power last December, effectively ending the home-grown golden boy’s chance of running the sprawling bank. I’m not quite sure why Klein didn’t leave in March, when John Havens, a long-standing Pandit ally, was promoted. The memo announcing the change in responsibilities included the sentence: “Mr Klein will chair a company-wide client committee focused on delivering ‘one-Citi’ to all clients and work on other firm-wide projects.” This is such meaningless nonsense that I don’t understand how anyone with a brain could sign such a memo. The author would appear to be chief executive Vikram Pandit himself. Pandit is quoted: “I am confident that with Michael focused on leadership with clients and John focused on management, we have a great partnership leading this institution.” Four months later, this great partnership no longer exists. What are we to infer from that? Now that Klein has left, who will be delivering one-Citi to clients, I wonder? Or perhaps, horror of horrors, there are going to be lots of Citi bankers delivering many-Citis to clients?

I hear that during the March negotiations surrounding the flailing Bear Stearns, Jamie Dimon received many plaudits from regulators and other senior bankers. But can it be true, as one mole whispers, that Dimon was more than once referred to as “a Great American Patriot”?

I hear that during the March negotiations surrounding the flailing Bear Stearns, Jamie Dimon received many plaudits from regulators and other senior bankers. But can it be true, as one mole whispers, that Dimon was more than once referred to as "a Great American Patriot"?

There is something about Americans that irritates other nationalities and particularly grates with the British. Perhaps it is their extraordinary enthusiasm for the most banal things (“Have a nice day”), their frequent euphemisms (referring to Hillary Clinton’s “mis-speaking”. Why not say that she lied?) and, of course, Americans are supposed not to do irony. A mole tells of a deposed senior American banker who spent half an hour moaning that, since his demotion, Senior Banker was no longer invited to any A-list events. That must be very hard because, for those who count, New York is just one big fund-raiser. It must be heartbreaking to be callously left off the list simply because you are no longer a big bagel on Wall Street. When you relate this story to English people, they roll their eyes heavenwards. When you tell the tale to Americans, they look shocked and shake their head sorrowfully, no doubt empathizing with the tragic fate of Senior Banker.

I have news for this moaning Minnie of a senior banker: it’s worse for your wife. Not only does she have to put up with the pitying looks of her supposed friends and broken conversations when she enters the room unexpectedly; she also has to suffer you droning on about how badly you have been treated, the perils of the credit crunch, and the malevolence of short sellers. Although Senior Banker’s wife is not interested in any of this arid financial detail, she is beginning to realize that the days of front-row seats at the Paris couture collections might be over for ever.

And talking of irritating American behaviour, I hear that during the March negotiations surrounding the flailing Bear Stearns, Jamie Dimon received many plaudits from regulators and other senior bankers. But can it be true, as one mole whispers, that Dimon was more than once referred to as “a Great American Patriot”? I am totally bemused. Dimon was simply doing his job. He purchased on the cheap a poorly run investment bank that had been stabbed repeatedly by short-sellers (presumably not great American patriots). “No, no Abigail,” a source demurred. “You don’t understand. If Bear Stearns had gone down, there would have been a domino effect on the other investment banks. Three banks could have collapsed that week.”


Readers of this column will know that I am a big fan of Jean-Pierre Mustier, the departing chief executive of Société Générale’s investment bank. I am sad that he will be replaced by Michel Pérétie, the former chief executive of Bear Stearns in Europe. A source comments: “Is Pérétie good news? What did he achieve during seven-and-a-half years at Bear Stearns?” However, I hear that Mustier himself suggested Pérétie as his successor, so I am prepared to give him the benefit of the doubt. I hope to catch up with the two Ms (Michel and Mustier) soon and will report back.

Finally, as seasoned financiers know, August is normally a treacherous month in the markets. Beaches beckon, volatility is high and turnover low. In case, as things unravel further, you are tempted to dip a toe back in the water, the Abigail with Attitude column has a pearl of wisdom for you: “The quickest way to go broke is to average down!” How was your month? Please send news and views to abigail@euromoney.com