Thain and CIT Group Offer Each Other a Second Chance (Update3)

Feb. 10 (Bloomberg) -- John Thain and CIT Group Inc. are giving each other something that ousted chief executive officers and bankrupt lenders usually don’t get: a second chance.

Thain’s record of success at Goldman Sachs Group Inc. and NYSE Euronext was marred by his exit from Merrill Lynch & Co. last year, when he was pilloried for $27.6 billion of losses, $3.6 billion of bonuses and $1.2 million of decorating expenses for his office. CIT, once the biggest independent commercial lender in the U.S., sought court protection last year, a move that’s usually a death sentence for a financial firm.

CIT, which survived its reorganization, and Thain, its new CEO, are counting on each other to burnish their reputations. John Reed, the former Citigroup Inc. co-CEO who recruited Thain in 2003 from Goldman Sachs to the New York Stock Exchange, says it’s a good match.

“He’s learned a lot,” said Reed, who was the Big Board’s interim chairman. At the time, Reed said he thought Thain, a fellow graduate of the Massachusetts Institute of Technology, needed to broaden his horizons after 24 years at Goldman Sachs. “He is today a different person than when he came over and first joined me, and a more capable person. He’s more mature.”

The CIT job gives Thain, 54, a chance to fix a public company whose business -- which includes working with about a 1 million customers in corporate, transportation, trade and vendor finance -- is tied to the heart of the U.S. economy. To rescue the company, Thain must find lower-cost sources of funding, lift restrictions on its banking unit and win over regulators wary after the bankruptcy wiped out a $2.3 billion Treasury Department stake.

Share Performance

CIT shares have gained 4.1 percent since the company announced Thain would take over on Feb. 7. The stock advanced 60 cents, or 1.9 percent, to $32.01 in composite trading on the New York Stock Exchange at 4 p.m.

“It’s clearly an opportunity to make a big difference and you can see why John would find it attractive,” said Paul Deighton, a former Goldman Sachs colleague who is now CEO of London 2012 Ltd., the organization that’s running the London 2012 Olympics.

Thain had previously arrived at new jobs with a track record of success. He became CEO of the NYSE after helping to build Goldman Sachs into the world’s leading investment bank. When he took the helm of Merrill Lynch four years later, Thain had modernized the exchange, doing deals that transformed it into an electronic, international and publicly traded company.

Weekend Sale

As the financial crisis deepened in 2008, Thain sold Merrill Lynch over a weekend, only to be fired by his new boss and criticized for the firm’s losses, bonus payments and office redecoration.

“He wants to find a way to erase the blot on his career from the ending of the Merrill Lynch saga, and what better way to do that than to take a very visible public company and turn it around,” said Douglas J. Elliott, a former JPMorgan Chase & Co. investment banker who is now a fellow in economic studies at the Brookings Institution in Washington. “If he does pull it off, he’s a hero.”

Thain’s arrival at CIT was well-timed. On Feb. 8, his first day on the job, the company officially became free of limitations on compensation and other activities imposed on companies that received money from the Troubled Asset Relief Program, or TARP. “Contingent value rights” that the U.S. Treasury received in CIT’s bankruptcy were “terminated and cease to exist,” according to a CIT regulatory filing.

Best Practices

“While the U.S. Treasury no longer has an investment in CIT, we are generally endeavoring to apply Treasury governance best practices,” CIT spokesman Curt Ritter said in an e-mailed statement Feb. 8.

Thain, the son of a doctor, grew up in Antioch, Illinois, population 13,400, a town 60 miles (97 kilometers) from Chicago. He didn’t visit the East Coast of the U.S. until he arrived at MIT in Cambridge, Massachusetts, to study electrical engineering. From MIT he went straight to Harvard Business School and then directly to Goldman Sachs, where he worked in investment banking and traded mortgage bonds.

In 1993, Thain moved into the administrative side of the company -- known as operations, technology and finance -- or by its nickname “The Federation” after the fictional organization in Star Trek, according to a Goldman Sachs executive who worked with Thain and spoke on condition of anonymity. Thain became chief financial officer and eventually ascended to president and chief operating officer under then-CEO Henry Paulson.

Risk Management

Several former colleagues from Goldman Sachs credit Thain with leading the effort to build the firm’s risk-management processes and infrastructure over the next decade, saying he excelled at understanding the plumbing of the organization and recruiting talented executives to join a department that is dismissed at many Wall Street firms as “the back office.”

“The very fact that you had one of the best people in the firm running it, which made it a breeding ground for other good people, you could see this was a place that you could make a real contribution,” London 2012’s Deighton said of his decision to move from investment banking into operations under Thain in 1993.

Bradley Abelow, who worked under Thain in the operations business for about a decade, said Thain was crucial to building a risk-management department at Goldman Sachs that could act as a check on the firm’s traders and bankers. He said Thain was also adept at collecting information from a variety of sources so that he didn’t rely too heavily on his deputies.

‘Extreme Challenge’

“I always wanted to surprise him, to tell him something he didn’t know -- I viewed that as an extreme challenge,” said Abelow, a founding partner of New York-based private-equity firm NewWorld Capital Group who previously served as chief of staff to Jon Corzine, the former governor of New Jersey. “I don’t know that I ever succeeded in that.”

Thain distinguished himself on Sept. 11, 2001, when terrorists struck the World Trade Center a half mile away, former colleagues say. Thain, who was the highest-ranking executive present at Goldman Sachs’s 85 Broad Street headquarters, turned his office into a crisis control center, established teams to locate Goldman Sachs employees and secured telecommunications for the firm.

“He’s just a very level head, very cautious, and has absolutely excellent judgment both on people and situations,” said Deighton.

Lehman’s Collapse

In the crisis that brought down Lehman Brothers Holdings Inc. in September 2008, Thain succeeded in persuading Bank of America Corp. to pay $29 a share for Merrill Lynch during a single weekend, a 70 percent premium to the shares’ closing value the previous Friday.

“He basically sold the company for a lot more than it was worth at a time when that was the right thing to have done,” Reed said.

Merrill Lynch’s losses accelerated after the sale and Ken Lewis, who was then CEO of Bank of America, fired Thain three weeks after the transaction closed. Thain found himself facing accusations that he’d failed to do enough to keep Bank of America apprised of the losses and that he’d accelerated bonus payments to Merrill staff. Information about Thain’s $1.2 million redecoration of his Merrill office, which took place when Thain joined in late 2007, was provided to the press at the same time.

In April 2009, Lewis was stripped of his chairman title at Bank of America after investors rebelled against his handling of the Merrill Lynch takeover. He later resigned from the company.

Cuomo Case

Last week, New York Attorney General Andrew Cuomo filed a civil fraud case against Bank of America, Lewis and former Chief Financial Officer Joe Price. The case alleges that they deceived investors and taxpayers in 2008 by not disclosing losses at Merrill Lynch before shareholders voted on the firm’s pending takeover, and used those losses to extract more bailout funds from U.S. regulators.

Bank of America, based in Charlotte, North Carolina, has called the charges “totally without merit” and lawyers for Lewis and Price have denied wrongdoing. Cuomo’s lawsuit said that “from the moment the merger was announced, Merrill was transparent with Bank of America management about the losses Merrill was incurring.”

The lawsuit “stands on its own and I’m glad that the truth has come out,” Thain said in an interview on Feb. 7. “I’m focused on CIT and I’m focused on moving forward -- that is history to me.”

Funding Plan

Thain said he’ll start his job by studying CIT’s businesses and determining what kind of funding model can be most successful.

Naming new senior managers will be a priority, Thain said. On Feb. 1, CIT Chief Operating Officer Alexander Mason became the fourth executive to announce a departure, saying he would leave on Feb. 26. That came on the heels of CEO Jeffrey Peek’s exit Jan. 15, and after CIT said in December that Chief Financial Officer Joseph Leone would retire in April. Chief Risk Officer Nancy Foster stepped down Dec. 31.

At Merrill, Thain assembled a management team largely by recruiting colleagues from Goldman Sachs and NYSE Euronext. Thain recruited Nelson Chai, chief financial officer at NYSE Euronext, to be CFO at Merrill. He said on Feb. 7 that Chai would probably be a candidate for the CFO position at CIT.

Thain will also have to adapt to a very different culture at CIT than he was used to in his Wall Street jobs, said Brookings Institution’s Elliott.

Different Business

“This may be significantly harder for him than even he thinks because he hasn’t really run this type of company before,” Elliott said. “It’s easy to think that because you’re good at finance in general that you’d be good at every single aspect of it. But lending to small businesses is quite a different business.”

Some of CIT’s clients who rely on the company to provide financing that enables them to ship their merchandise to retailers are concerned that Thain doesn’t have enough understanding of that side of the business, known as factoring, said Vano Haroutunian, a partner at law firm Ballon Stoll Bader & Nadler PC in New York, which advises clothing and accessory companies that are customers of CIT’s.

“They don’t see the logic of going with someone who’s from investment banking rather than someone who would be a little bit more familiar with asset-based lending and factoring,” Haroutunian said. “The concern is not about him personally, although there is some of that because of his record at Merrill Lynch.”

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net