Nov. 15 (Bloomberg) -- When John A. Thain started trading mortgages at Goldman Sachs Group Inc. more than 20 years ago, little did he know it would help make him the indispensable man when Merrill Lynch & Co. made him an offer he couldn't refuse.

The 52-year-old Thain, who graduated with an engineering degree from Massachusetts Institute of Technology on the way to becoming president of Goldman Sachs and chief executive officer of the New York Stock Exchange, is the first CEO in Merrill's 93- year history to have nothing to do with the world's largest brokerage until yesterday, when he agreed to join the 64,200- employee securities firm on Dec. 1.

For Merrill, which used to pride itself on its ability to groom its leaders from within in a so-called Mother Merrill culture, Thain's appointment is a recognition of the mess made by predecessor Stan O'Neal, who disclosed a record $7.9 billion of writedowns related to wayward mortgage investments before he was ousted after a 21-year Merrill career, including the last five as CEO during which he forced out most of his would-be successors.

For Thain, who left Goldman in 2004 when the NYSE was embroiled in its own leadership crisis following Richard A. Grasso's resignation under pressure, managing Merrill is an opportunity to ``restore a sense of pride'' and ``morale'' that made it the most famous icon on Wall Street, according to Winthrop Smith, a former head of Merrill's international brokerage.

`Sickening' Losses

Merrill reported a $2.24 billion loss on Oct. 24 that was six times what the company forecast three weeks earlier. The same day, the U.S. Securities and Exchange Commission began an inquiry into matters related to the subprime mortgage portfolio, according to a regulatory filing from the company this month.

The firm may face another writedown of as much as $10 billion, Deutsche Bank AG analyst Michael Mayo estimates.

Former CEO Daniel Tully, who tripled Merrill's share price during his four-year tenure in the 1990s, called the losses ``sickening'' and lamented the board of directors' need to look outside the firm for its next leader.

Merrill's stock is the worst performer this year of the five biggest U.S. securities firms. Its 38 percent plunge, through yesterday, had erased more than $30 billion of market value. Standard & Poor's, Moody's Investors Service and Fitch Ratings have cut Merrill's debt rating and are considering further downgrades.

Mortgage Bets

Credit-default swaps for Merrill closed yesterday in New York trading at 119 basis points, down from a high of 139 basis points on Nov. 8, data compiled by CMA Datavision show. The decline indicates that investors expect the company's credit quality to improve.

Merrill shares fell 68 cents, or 1.2 percent, to $57.30 in New York Stock Exchange composite trading. Analysts at Credit Suisse Group upgraded their Merrill rating to ``outperform'' from ``neutral'' because of the management change.

Merrill's market capitalization is $49.6 billion, ranking behind Goldman's $99.3 billion and Morgan Stanley's $59 billion among the biggest U.S. securities firms. Merrill trades at about 1.5 times book value, compared with Goldman's 2.8.

Mortgage-bond underwriting was one of several businesses O'Neal, 56, entered as he sought to copy Goldman's strategy of taking bigger bets with the firm's capital to increase shareholder returns. O'Neal also put money into private-equity investing, energy trading and hedge funds.

`Risk Controls'

By choosing Thain, after a two-week search led by board member Alberto Cribiore, Merrill's directors signaled that they aren't ready to restrain the firm from risk-taking, said Adam Compton, an analyst who helps manage $150 billion at RCM Capital Management in San Francisco, including about 700,000 Merrill shares at the end of September.

``Thain comes from Goldman, where they're built around taking risk but getting paid for it,'' Compton said. ``He may keep the proprietary risk businesses that Merrill has built up over the last two or three years, but with better risk controls.''

Goldman's trading prowess has helped it become the most profitable firm in Wall Street history. Chief Executive Officer Lloyd Blankfein, as well as his two top deputies, ran trading divisions as they rose through the ranks. Revenue from fixed- income, currencies and commodities, the firm's biggest unit, rose 71 percent in the third quarter as the firm profited from bets on declining prices for securities linked to mortgages.

``It's not that trading is bad for Merrill Lynch, it's that trading is bad for anybody without the requisite risk controls,'' said Roy Smith, a finance professor at New York University's Stern School of Business and a former Goldman Sachs partner. ``Thain's an expert at that, so in a sense he's a fixer.''

Euronext Takeover

The son of a family doctor and a housewife, Thain grew up in Antioch, Illinois, and joined Goldman in 1979 after graduating from Harvard Business School in Boston. He led a mortgage trading desk at the firm in the mid-1980s at a time when that market was dominated by Salomon Brothers. In 1994, Thain became chief financial officer and head of operations, technology and finance. He was promoted to co-president in 1999, serving under then-CEO Henry Paulson, now U.S. Treasury Secretary.

Thain left Goldman for the NYSE in January 2004, after Grasso was ousted amid a furor over his $140 million pay package. In April 2005, Thain hammered out an agreement to purchase Archipelago Holdings Inc., transforming the exchange into a for- profit company. A year later, he negotiated the $14.4 billion purchase of Paris-based Euronext NV, creating the first trans- Atlantic stock exchange.

Grasso said in an interview yesterday that Thain has ``an enormous range of skills and demonstrated them both at Goldman and the NYSE.''

Prince Departure

NYSE Euronext shares have gained 35 percent since they were first sold to the public in 2006. That's almost twice as much as the Standard & Poor's 500 in the same period. Thain will be replaced at NYSE Euronext by Co-Chief Operating Officer Duncan Niederauer, 48, who also worked at Goldman before joining the world's largest stock exchange earlier this year. Thain was paid about $5 million in salary and bonus in 2006.

Thain faces far different market challenges at Merrill. Surging defaults on home loans in the U.S. this year have caused prices for mortgage-backed and related bonds to plunge, triggering a flight by investors from risky investments that's spilled into markets for short-term commercial paper and high- yield loans.

Unhedged Positions

The world's largest securities firms and banks, including Citigroup Inc., have announced more than $45 billion of third-and fourth-quarter losses from writedowns and bad loans. Citigroup, the largest U.S. lender, reported Nov. 4 that it would have to write down the value of its subprime mortgage-related securities by as much as $11 billion. The disclosure prompted CEO Charles O. ``Chuck'' Prince III to resign. Thain had been among the potential candidates to succeed him.

Merrill, under O'Neal, became the biggest underwriter of collateralized debt obligations, or CDOs, a kind of security whose prices have tumbled because many were packaged from subprime mortgages. The firm was left holding $15.2 billion of unhedged CDOs as of Sept. 30. Merrill also had $5.7 billion of additional ``subprime-related exposures,'' including loans, according to a regulatory filing.

Those will continue to weigh on Merrill's balance sheet after Thain takes over, said Matthew Albrecht, an equity analyst at Standard & Poor's. ``I think it takes a few quarters before a lot of that risk is off their books.''

`Pretty Shameful'

O'Neal, who rose through the ranks after starting as an investment banker in 1986, openly disparaged the term ``Mother Merrill,'' used to describe a corporate culture seen as more forgiving than at other Wall Street firms. O'Neal never won the admiration of Merrill's 16,610 brokers and he rankled the firm's alumni by forcing out rivals, including former Chief Financial Officer Thomas Patrick and ex-trading and investment banking chief Arshad Zakaria.

Merrill's retail brokerage is the largest of its kind in the U.S., with a combined $1.8 trillion of client assets. It accounted for 48 percent of Merrill's $20 billion of total revenue during the first nine months of the year.

Prior to O'Neal's appointment, every chief executive going back at least to Donald Regan, who ran the firm from 1971 to 1980, emerged from the brokers' ranks. They included Roger Birk, William Schreyer, Tully and David Komansky, who preceded O'Neal. Thain doesn't have experience managing brokers who serve individual investors.

``It actually is pretty shameful on the part of the former CEO and board of directors that they didn't have an orderly succession,'' said Winthrop Smith, whose father was one of the company's founding partners.

Other executives reported to be under consideration to replace O'Neal included BlackRock Inc. CEO Laurence Fink and Merrill Co-President Greg Fleming. Merrill spokeswoman Jessica Oppenheim said yesterday that Fink wasn't offered the job.

Merrill is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net

Last Updated: November 15, 2007 18:05 EST