Reviewing John Thain

Merrill Lynch CEO John Thain was interviewed after today's market close by CNBC's Maria Bartiromo.  Thain discussed the recent decision to sell distressed CDO's for 22 cents on the dollar, raising more capital, his critics, and future prospects.

It is an excellent interview (see it all here),  Maria, as usual, has a deft balance.  Unlike many journalists who think they are themselves the story, she has a knack for keeping the focus on the subject.  She was respectful and engaging, but not soft.  She asked the tough questions.  She also offered Mr. Thain the opportunity to cover any point that might have been missed.  It was a fair opportunity to air the issues.

The CNBC headline writer, capturing the pervasive negative sentiment of recent times, called this Merrill's Thain Won't Rule Out Further Writedowns.  (This is what we call "intern season" at CNBC.)  That was certainly not the key takeaway.    Here were Mr. Thain's key points:

1. He sold assets because the losses from these sources were overwhelming the normal profit centers of the firm;
2. There was no "put" of any sort given to the CDO purchaser Lone Star Funds.  Critics have alleged that since Merrill is financing the purchase, the actual price should be market lower.  Thain made it clear that there was no put provision.  Unless the securities swiftly went to zero, something regarded as extremely unlikely, the financing had a very different effect.  Most of the cash flows from the securities will return to Merrill.
3. He does not see a reduction in the dividend, despite the dilution of shares.  While this topic will be evaluated each quarter, as it always is, he prefers to address the question by increasing the share price.
4. The answers to past questions about the need for additional capital were based upon the circumstances at the time. Statements following various capital raises, were accurate at the time.  The downward spiral of mortgage securities caused a changing perspective.
5. At the moment, no further capital is needed.  If circumstances change, that conclusion might change.

We shall get the market verdict tomorrow.

Our Take

There were two different ways of looking at the Thain saga.

Financial CEO's are serial liars and cheaters.  This viewpoint was embraced by several publicity-seeking pundits and bloggers, including (sadly) some of our featured sources.  Most of those criticizing Mr. Thain, while they might be intelligent people, lack the training, experience, and management skill to act as CEO of a large corporation.

Despite this, many readers embrace the opinions of these critics, who seem more like breast-beating pontificators.

Financial CEO's are optimistic about their prospects.  This viewpoint suggests that consumers of the information should apply an appropriate discount and watch carefully for changes in circumstances.

Conclusion

Anyone who does regular commentary (including us!) will make some bad forecasts.  If one were to go back and list the various predictions from the critical pundits, one could find plenty of inconsistencies.  They are taking a cheap shot.

A much more reasonable explanation is that circumstances changed, just as Thain reported.  (We tried to point this out a few days ago).  Consider the recent shift of opinion by an icon of the perma-bear bloggers, Jeremy Grantham.  He recently altered his stance on commodities and emerging markets (as did we!).  In defense of this position he noted, as follows:

To those who would criticize the shift, he turned to a famous utterance by economist John Maynard Keynes:

“When the facts change, I change my mind – what do you do, sir?”

Investment Conclusion

We are bothered by the unnamed CNBC staff writer's summary of the sale to Lone Star, as follows:

The fire sale nature of that deal added to concerns that the global credit crisis, which has already led to more than $400 billion of write-downs and losses at major banks, still has a long way to run.

The moves also raised further questions about the ability of Thain, who only became Merrill's CEO in December following the ouster of Stanley O'Neal, to turn around the firm.

This is an incorrect and unduly negative interpretation of events, since financial stocks actually rallied after the Merrill move.

We think that Merrill Lynch is attractive at current prices.  We own stock and calls in various accounts, including some holdings from higher levels.

Comments

[Dave, Canada]

I agree with your conclusions about Thain.
I sold naked Merrill Oct $25 puts yesterday at $2.80. If the shares retest their lows, I might get put MER at a net cost of $22.20, less than what Temasek & mgmt paid for their shares recently. If the shares have bottomed & keep going up, I'll earn the premium.

[VennData]

As the value-oriented ETFs fill up with financials of every make and model, unless "it's different this time" a buying interval is near.

The Meredith Whitney types are right about near term write downs. The financial industry needs to be right-sized. Business models are being re-worked, aggressively.

...but the survivors of this violent breeching of the staid fortress walls of American old school finance will be solid companies. Futhermore, the "new capital" won't be quick to sell once they recover.

[shrek]

the only reason to own any financials is a moral hazard bet. There is nothing to suggest that they are going to get back to normal anytime soon. Much of there business is gone forever

[Larry Nusbaum]

"There were two different ways of looking at the Thain saga."

Or, looking at a third way why would anyone listen to a CEO interview to gain information? They are nothing more than cheerleaders for their stock. He would have been better off keeping his mouth shut or saying "I don't know" or "I hope not" or "we're not ruling that out".

Thain now lacks credibility at the very least. His prior statements turned out to be false, wrong, mis-leading, foolish, ass-backwards, self-serving and damaging to investors.

[jd]

Maria is a deft interviewer?

There goes what little credibility you had . . .