He Fixed the NYSE. Can He Fix Merrill?

John Thain won kudos for turning around the Big Board. Now he faces a bigger challenge cleaning up the subprime mess at the investment bank.

Former Merrill Lynch (MER ) CEO E. Stanley O'Neal's dream to make his firm the next Goldman Sachs (GS ) may live on. On Nov. 14, Merrill tapped John A. Thain, CEO of NYSE Euronext (NYX ) and a former Goldman executive, to be its new chief.

In Thain, the troubled Wall Street firm gets a seasoned CEO who has won kudos for pushing the New York Stock Exchange into the modern age of electronic trading. Perhaps more important are Thain's two decades at Goldman, in which he became a leading innovator in trading technology. Thain, 52, also spent time on Goldman's mortgage bond desk, experience that should help as he tries to fix Merrill's subprime problems. "You can't shy away from the [Goldman] model," says Larry Tabb of the consulting firm Tabb Group. "What Merrill needs is a better risk management."

The irony, of course, is that O'Neal, who never worked at Goldman, tried to remake Mother Merrill in Goldman's image. He pushed the firm to move beyond investment banking and retail brokerage, encouraging moves into hugely profitable areas like proprietary trading, private equity, and exotic bonds like collateralized debt obligations. But that strategy blew up when Merrill took a $9 billion hit on CDOs and other securities.

Now, Thain must clean up the mess, the extent of which is not yet known. Although most of the other businesses are doing O.K., Merrill has $30 billion in mortgage-backed bonds and CDOs on its books. Analysts are betting the firm will take a further multibillion-dollar writedown this quarter.


Meanwhile, Thain, who has no experience in retail brokerage, will have to soothe Merrill's in-house brokers. The team, which long resented O'Neal's strong-arm style, had hoped their boss, Robert McCann, head of the private client group, would nab the top spot. To quell dissent, Thain may promote McCann. "He understands the power of culture, which Stan did not," says Win Smith, a former Merrill executive and a son of one of the firm's founders. "He'll take time to understand the old culture and what made it so good."

Thain is quite the fix-it guy. He joined the NYSE in 2004, when morale was at an all-time low: Chairman Richard A. Grasso had been drummed out in a scandal over his pay package, and the exchange's position in equity trading had eroded. Thain orchestrated a fast turnaround. In 2006, the NYSE acquired the Archipelago electronic exchange and took the newly combined company public. Later he forged a union with the Euronext exchange, creating an international powerhouse in equities and derivatives trading. NYSE's stock is up some 600% during his tenure. "His record as a value creator speaks for itself," says Jamie Selway, a former chief economist at Archipelago. Adds a former Goldman colleague: "John loves to take things apart and fix them. He understands risk."

Still, Thain's job this time could be tougher. "You could have [physicist] Stephen Hawking running Merrill and it wouldn't matter," says Meredith Whitney, a CIBC (CM ) analyst. "It's at least a four-year project."

By Matthew Goldstein and Emily Thornton, with Mara Der Hovanesian, Roben Farzad, and Aaron Pressman

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