We’re wondering about the state of Reuters’ “cred-o-meter” after seeing the news agency’s Wednesday headline: “Thain credibility survives despite Merrill capital U-turn”.
We’re not saying the former Goldman Sachs golden-boy-cum-Merrill-CEO has become a pariah or a laughing stock after all those assurances that Merrill Lynch was well-capitalised etc etc – not at all. But the extent of surprise – and dismay – generated by his U-turn has clearly taken some dazzle off his image. Reuters manages to cite veteran banking analyst Charlie Peabody saying, in a note to investors on Tuesday: “…[We] think [Merrill’s] management has damaged its credibility”.
Peabody adds to the doubts raised by key analysts about Thain’s moves. The FT reports Wednesday that Mike Mayo, Deutsche Bank analyst, for example, said Merrill’s action, a fortnight after Thain said it did not need more capital, “raises ongoing credibility issues for the industry”.
Peabody noted that Merrill still has additional exposures in areas such as commercial real estate that will likely trigger more writedowns. And, admits Reuters,Thain has made other missteps, such as agreeing to raise capital at terms that would make future capital raising – such as Tuesday’s deal – quite costly.
But, it adds, Merrill’s shares rose $1.92 to $26.25 on Tuesday, “which does not typically happen when a company issues millions of new shares at a discount to the prior day’s closing price”.
Ah yes, but it’s not unusual to see a bounce the day after a stock has been sold down by nearly 12 per cent.
However, there are always those Pollyanna analysts and investors who look on the good side of everything. And Reuters finds them, quoting first, Aneet Deshpande, head of trading at Allegiant Asset Management, saying: “Thain is just an unbelievable manager. If anyone’s going to come out of this smelling of roses, he will.”
Then we hear from Winthrop Smith Jr, son of a Merrill founding partner, who reasoned that the asset sale and stock offering will “allow the market to focus on the fundamentals of Merrill, which are really pretty good” and concluded that Thain is “making many of the right moves”.
“Thain’s reputation has stayed intact in part because of his sterling resume”, the report then asserts – a statement that possibly pains countless other high-achieving, later derided, chief executives who have fallen by the wayside.
“He worked at Goldman Sachs for more than 20 years,” gushes Reuters, “before the New York Stock Exchange appointed him as its chief executive. There he helped the exchange expand into electronic trading and overseas through its acquisition of Euronext. Thain took the reins at Merrill Lynch in December 2007, after Stan O’Neal was ousted”.
But just like journalism, where you’re only as good as your last story, in CEO Land, you’re generally only rated as highly as your last company.
Other mainstream media, meanwhile, seem as divided as analysts on the Thain cred question:
The Wall Street Journal, for one, gives a fairly upbeat view of initial reaction to Merrill’s move, saying “so far, so good”.
But, it notes: “The 53-year-old Mr Thain, who took over in December, also must reckon with the potential long-term cost of his handling of Merrill’s woes during the past few months. Even as they praised his bite-the-bullet decision on Merrill’s mountain of CDOs, several investors said the move shows just how much Mr. Thain underestimated how much further the markets would fall.”
The FT meanwhile takes a mixed view in an analysis by its US reporters, who ask: “At what point does doing something ‘dumb’ become the only choice you have?”
Thain appeared to “hit that moment” at some point on Monday when he agreed to sell a pile of mortgage-backed CDOs with a notional value of $30.6bn to a distressed debt investor for the princely sum of $6.7bn, the FT said. Merrill also agreed to provide the buyer, Lone Star Funds, with 75 per cent of the money to buy the assets.
The message from Thain? Get these nasty things away from me no matter what the cost.
The cut-rate sale came just days after Thain said in a conference call that he would not do anything “dumb” like sell assets “at any price we could get”.
This sale, at 22 cents on the dollar, certainly seems like the only price they could get.
Of course, Thain also said at the time that Merrill was in a “very comfortable spot in terms of our capital”.
Then he said on Monday that Merrill would raise yet another $8.5bn in new shares to offset the writedown on the asset sale, among other things, further diluting shareholders by another 38 per cent.
So what on earth is going on with Thain, “the former Goldman Sachs golden boy who was supposed to turn Merrill round in a heartbeat?”, asks the FT.
Glen Schorr, UBS analyst, suggested in a note that Thain’s strategy may be to finally navigate Merrill back to its core strength as a private client and retail asset manager and an investment bank that focuses on advising clients rather than engaging in extensive proprietary trading and exotic structured product creation.
“At the end of the day, the private client and asset management businesses now comprise an even larger component of the company (not the way you want to get there, but here we are), which should count a little more as the company is smaller and the balance sheet has incrementally less overhang,” he wrote.
FT Alphaville – as well as some analysts – suggests that perhaps, he (still) knows things we don’t.
As Schorr says, we haven’t necessarily seen the last of the writedowns across Merrill’s remaining exposures. The firm, he notes, retains $7.4bn in non-US residential mortgages, $1.5bn of Alt-A mortgages and around $18bn in commercial real estate exposures at the investment bank and $18bn in mortgage exposure at its bank subsidiaries.
Still, while more writedowns may lie in store, the general view is that Thain has taken an embarrassing but necessary step in the right direction, concludes the FT.
In the end, does the question of Thain’s credibility matter? Well perhaps only the next time that Thain, after all the latest writedowns and capital raisings, tries to brush aside concerns and tell investors and analysts that his firm is “well capitalised”.
As Lex says, regardless of the response to Merrill’s move, Thain’s repeated assurances on capitalisation will stick in the minds of long-suffering investors.
One way or another, Wall Street will have to bridge the gap on valuations. Closing the credibility gulf will prove equally tough.