In times of great troubles, it is natural to look for a savior, someone who can get us out of trouble with a wave of the hand and a confident smile.
The business media is like that. It is never ceases to look for—and find!—saviors of corporations, investment banks, even the entire financial system, despite the fact that these dear leaders, one by one, invariably, inevitably, fail. In this, they remind us of members of certain Hasidic sects, who, impatient for the coming of the Messiah, are given to chanting: “We want Moshiach NOW!”
The birth and death of false idols in the business press is a strange and important phenomenon. Strange because it keeps happening. Important because it is a symptom of a serious weakness in coverage. It reflects the fact that the press is clinging to an old narrative, built around Wall Street Masters of the Universe.
This narrative persists despite the fact that recent events have demonstrated that the system suffers from fundamental flaws no lone individual can fix. And thus, while never ideal, this habit is now especially pernicious. To think that any one person can right a corporation as drenched in subprime as Merrill is to fundamentally misunderstand the financial crisis.
The saga of Hank Paulson is a particularly blatant example of hero-worship gone wrong, but there are other fallen idols. Another obvious example is Lehman’s Dick Fuld. We recently focused on his demonization, but could have done an equally lengthy look at his rise.
Which brings us to the story of the latest collapse, John Thain: the erstwhile “Mr. Fix-It” who not only couldn’t fix the unfixable Merrill but now can’t even fix his own career.
In an effort to trace Thain’s transformation from golden boy to golden calf, we undertook to scour the archives. The short of it is that Thain courted the press from the beginning, with great success, and the press responded with an enthusiasm that betrayed a lack of understanding that the damage Merrill caused to others and itself was far, far beyond repair. For this, the press only has itself to blame.
As for the long of it: It’s actually a useful lesson in how easy it is for someone in power to develop a “character” that doesn’t actually exist for a narrative that never quite fits the facts. So let’s start.
Named Merrill CEO in November 2007, Thain took over the corner office December 1. The media immediately offered him the mantle of authority, based in large part on his transformation of the New York Stock Exchange—a performance from which traces of problems were scrubbed, so that when they occasionally surfaced later, they came as a surprise.
The Wall Street Journal’s lengthy front-page piece November 15 struck a typically hopeful tone. The language echoes Chinese Communist paeans to the Great Helmsman during the Mao era:
Merrill Lynch & Co.’s choice of John Thain, head of NYSE Euronext, as Merrill’s new chief executive signals that after years of inner turmoil and risky expansion, the beleaguered financial giant wants a pair of steady hands at the helm.
For Wall Street at large, the message in the elevation of the low-key financial veteran is clear. After an era of go-go growth that led firms into profitable but chancy areas like mortgage securities, the industry is moving toward the kind of leader who gets down into the nitty-gritty of risk management.
And the nitty gritty of interior decorating. The piece went on to observe:
It’s no coincidence, say Wall Street executives, that the firms that haven’t been damaged as badly are led by executives with extensive operational experience. ‘You look at a Dick Fuld or a Jamie Dimon, and they have dirt under their fingernails,’ said a person close to Citi’s board.
Dick Fuld? Whoops!—last year’s false messiah. As it happens, Thain’s management style turned also out to be a problem, despite the fact that readers wouldn’t find that out for more than a year. We’ll get to the specifics further down, but for now just note it as one of the assumptions that never had sufficient backing.
And quite frankly, the WSJ, which in a separate piece offered the prescient suggestion that Bank of America was the most suited to buy Merrill, doesn’t look as silly in hindsight as many of the other observers.
Like The Globe and Mail, which resurrects Thain’s Goldman Sachs nickname “Thain the Humane.”
BusinessWeek was one of several outlets that went with the Superman metaphor (because hey, when you’ve got a Clark Kent look alike, what else is there to do?). Meanwhile, the FT’s Lex column asks us: “Why is John Thain the right person to fix Merrill Lynch’s woes?” And then goes on to answer itself.
Anyhow, in the months after this initial flurry of excitement, reality did start to set in. But the problem is, the press had spent so much energy building Thain up that even in the face of his highly questionable performance, they made it hard for themselves to abruptly about-face.
And so Merrill Lynch’s performance got worse and worse under Thain, but he didn’t receive much blame for it until February 2009. The press’s enthusiasm for Thain did dim somewhat during his Merrill tenure, but any fair reading shows he got way too much slack for way too long.
Thain himself continued to be positive about Merrill’s outlook, for no obvious reason, beyond the fact that he headed the company—and, unfortunately for Bank of America shareholders and U.S. taxpayers, he was greeted with little skepticism. Sure Merrill wrote off $11.5 billion and reported a fourth quarter loss of almost $10 billion, but Thain still insisted, as Dow Jones reported, “the firm is in good shape after the writedowns.”
To give credit where it’s due, we note that a few pieces did a better-than-average job of diminishing Thain’s carefully crafted PR. But at the time, this kind of reasonable skepticism was clearly the exception. It didn’t generate real momentum.
Speaking of PR: Thain seems to have been on the interview circuit for a good part of the past year, and the misinformation campaign clearly had an impact in softening up the press. Having talked with the WSJ for an interview published January 18, 2008, Thain spoke with the FT February 1, where he merited the introduction of “Wall Street’s Mr. Fix-It.” The Sunday Times applied the same well-worn moniker in “‘Mr. Fix-It’ John Thain eases pain at Merrill Lynch,” an early March interview, as did Forbes in an early April profile that noted, among other things:
Apart from the subprime calamity, Merrill’s investment banking and institutional equity divisions had a good year…
We’re sure the accommodations were lovely on the Titanic. To speak of results at Merrill “apart from” subprime was ludicrous even at the time.
Audit Reader, this is why the hero narrative doesn’t work. The financial problems are systemic. No single person can come in and turn things around any more than any one executive, no matter how powerful, can turn millions of struggling subprime borrowers into prime ones. It just doesn’t work that way. And that goes double for someone like Thain, who either didn’t see or didn’t admit the depths of the crisis.
The fact is, Thain got away with saying a lot of things. In April, he was still pedaling the increasingly well-worn line that things at Merrill might be bad, but they would turn around.
At least one observer detected that even Thain now seemed to have less confidence in his words. But whether or not his own confidence was flagging, his reputation was still sufficiently intact that the WSJ led off a Heard on the Street segment with:
John Thain has done such a good job stabilizing Merrill Lynch & Co. that investors already are betting he can return the Wall Street firm to profitability and growth in the near future.
It is clear in hindsight that this evaluation was, um, misinformed. What’s more, it was pretty questionable at the time. But the WSJ insisted on spinning bad news positively. Job cuts? They “Show Thain Is Boss.” Sure, but maybe he cut the wrong jobs. Who knows?
It was not until summer 2008 that we got appropriately skeptical reporting of any volume, and this only after hideous results sent the stock into a freefall. BusinessWeek offered some badly needed reality in a July 15 piece that asked “How Bad Is It?”:
Poor Merrill Lynch (MER). Was it only three months ago that investors were buying shares of the nation’s third-largest broker ahead of its first-quarter earnings announcement? Not this time around. Since the beginning of May, Merrill’s stock has dropped 45%—and touched a nine-year low of 26.50 on July 11, as investors continued to pound the stock in the days leading up to the company’s July 17 earnings release.
What has changed? Back then, optimistic investors hoped the worst was over. Now, they know it’s not.
Indeed, the second quarter results did force a re-evaluation of what had been largely unquestioned optimism about Thain—although the degree of re-evaluation varied from piece to piece and, this is the key point, by no means represented a seismic shift. Listen, with what we knew at that point about subprime and the toxic crud it was made into, a properly skeptical financial press would have dropped the deference thing by now.
The past continues to haunt Merrill Lynch & Co. Chairman and Chief Executive John Thain.
And the NYT observed the differences between the expectations for and the results of Thain’s Merrill tenure, the “comedown” as the Times story puts it.
But Thain is still surprisingly unscathed, because the press in general continued to take him at his word even though he had already failed in his main task: to properly assess and candidly disclose the extent of the problem left by a predecessor.
David Weidner, at Dow Jones, was ahead of the pack when he drew the conclusion July 22 that “Thain Should Shoulder Some Blame at Merrill.” It would be several months until this idea, which was right, really took hold.
The FT, on the other hand, took a common tack July 30, when it noted that
while more writedowns may lie in store, the general view is that Mr. Thain has taken an embarrassing but necessary step in the right direction.
And yet again Thain took his case to the media. The NYT reported that “John Thain said he had to do something to stop the bleeding at Merrill Lynch.” And while he was at it, he “disputed the notions that he misled investors about his intentions to raise capital.” He elaborated in an August 18 BusinessWeek interview. And he still managed to earn positive reviews from the WSJ September 12.
When news of Bank of America’s takeover of Merrill came in mid-September, many news outlets wrote as though straw had been spun into gold. Here, for example, is the lede of a September 15 Washington Post story:
Bank of America struck a $50 billion deal yesterday to buy Merrill Lynch, a merger that will unite the nation’s largest consumer bank with one of its most celebrated investment banking firms, according to sources familiar with the negotiations.
Celebrated? That had never been true, and now?
In a similar vein, The Globe and Mail informed us September 16:
In less than 48 hours, Mr. Lewis had transformed Bank of America from a big retail bank in the United States into a global financial powerhouse.
Powerhouse? Remember, this is the fall of 2008.
The NYT was more cautious, but even it couldn’t help observing that “the purchase of Merrill puts [B of A] at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.”
The WSJ even suggested Thain to head a new Treasury Resolution Trust Corp., as Thain’s name also floated around both as the possible successor to Ken Lewis at B of A, where he had been appointed head of global banking, securities and wealth management, and as a possible McCain Treasury secretary. Can you imagine? By December, the WSJ offered plaudits to both Thain and Lewis.
We are not the only ones to wonder at the tone of this coverage. In mid-September, Dow Jones’s Jon Friedman wrote:
I cringed as I watched the press conference for Ken Lewis of Bank of America and John Thain of Merrill Lynch on Monday. The two gathered to discuss B of A’s proposed acquisition of Merrill.
The event should have been regarded as a sorry state of affairs, yet another glaring sign of greed, stupidity and mismanagement on Wall Street. Why else would Merrill Lynch, Wall Street’s most acclaimed ambassador to Main Street, among other verities, be forced to sell itself in such an inglorious way?
With all the carnage, you might expect to see a pinstripe lynch mob of sorts encounter the two chief executives. But the media were so polite and deferential to the two CEOs, they behaved as if the press conference were a victory lap for the financial services industry.
If you want a more appropriate tone, try this mid-September BusinessWeek piece. And we can’t help but point out the impressive Gretchen Morgenson at the Times, who offered us an excellent early November piece in which she traced Merrill’s years-old subprime strategy and subsequent fall. Thain doesn’t figure prominently here, and he shouldn’t. Morgenson pulls us away from the hero/antihero narrative and gets us back to looking at systematic problems. The difference is clear. And yet the business press never learns this lesson.
December 2008 was a pivotal month for Thain, when Merrill’s cracks became so wide that his carefully crafted persona was impossible to sustain.
The first week brought no major damage. December 5, shareholders of the two companies approved the sale despite doubts. Thain still looked pretty good.
But then came the bonus issue.
The WSJ broke the story December 8 that Thain had requested a $10 million bonus, and furor ensued. (Credit must be given the Journal’s Susanne Craig, who is perhaps the best-sourced reporter on Wall Street.) Both the New York attorney general and the Senate majority leader condemned the (ultimately failed) request. As did pretty much everyone else.
Finally, something that really pierced Thain’s armor. But still, the focus here is on the man and not the institution. The bonus came to serve as a proxy for the real outrage: the crap that Merrill and all of Wall Street held and how it came to hold it. Outrage was the right response to the bonus request, but where was all of the skepticism earlier?
Pieces like the WSJ’s “Mr. Fix-It Failed to Take Measure of Mess” observed, “Thain Proved Unable to Repair Merrill or get B of A Backing, and Underestimated Depth of Financial Crisis.” And suddenly those old complaints about Thain’s NYSE tenure come out of the woodwork. Now you tell us!
The FT, meanwhile, told us, “Mr. Fix-It Masterstroke Comes Unstuck.” And took aim even at Thain’s main claim to success, selling Merrill:
As for his masterstroke, the sale of Merrill to BofA, even that wasn’t his idea, according to several people involved in the matter. Mr Thain’s top lieutenant, Greg Fleming, urged him to approach BofA in the days leading up to Lehman’s September collapse. But according to several witnesses who were with Mr Thain at the New York Federal Reserve on the weekend of the deal, Mr Thain called Mr Lewis to initiate talks only after being urged to do so by his former Goldman boss, the then-US Treasury secretary Hank Paulson.
A feeding frenzy!
These stories really point to the biggest problem with creating narratives around individuals: The story doesn’t remain as flexible as it should be. The hero narrative divides the world into good and bad. And so angels like Thain become demons— like Thain.
And we don’t get the details unless they fit the narrative of the moment. For example, it took us by surprise when we found out late in the game that the level-headed engineering grad John Thain lived like the King of Siam, with a Westchester estate big enough to merit five addresses in three towns. That makes his controversial office-furniture purchase more understandable. People, please. If you are going to focus on the personal, at least give us all the gory details, and give them when they matter. We shouldn’t have to scour the tabloids for these.
As for Thain, he is now a full-fledged member of the Rogues Gallery.
Reuters informed us:
Once they were the brightest stars in the investment universe, but Goldman alumni—including Thain, former Treasury Secretary Hank Paulson and former Citigroup Chairman Robert Rubin—look much less brilliant now.
Barron’s also broods over the past, offering us “time-cured aphorisms about bear markets,” including:
‘In a bear market, no eminence of the financial world comes out the other side with his reputation untarnished.’ Alan Greenspan, Henry Paulson, Richard Fuld, even Warren Buffett have either seen their pedestals kicked from beneath them, or at least lowered.
We can now add John Thain—Goldman Sachs and NYSE alumnus, the onetime orneriest sheriff come to town at Merrill Lynch—to this list.
Now this raises a question. If this has become a pattern, why can’t the press see it coming? Or, at least, keep in mind from the beginning that it is a very real possibility? Why build up heroes knowing you will likely be bringing them down again? And in the aftermath give us knowing comments like:
With hindsight, it seems obvious that Mr. Thain, who got his MBA at Harvard Business School, wouldn’t last long.
And actually, this piece gets it wrong even in hindsight! The culture of B of A and the culture of Merrill just weren’t compatible, goes the logic here. But this clash-of-cultures model misses the point. In very important ways Merrill and B of A were the same. That is the story. Not personality or management-style differences.
One of our least favorite techniques for dealing with fallen heroes is revisionist history. Like when Reuters proclaimed that Thain
was regarded until 14 months ago as one of Wall Street’s steadiest hands.
Fourteen months? More like three or four, at most.
And you get a publication like Forbes trying to cover its tracks. Its April 7, 2008, cover story on Merrill turned out to be way off track—“The credit-markets seizure aside, Merrill is in damn good shape”—and got explained this way in October:
Our cover story on Merrill Lynch said the brokerage giant was doing ‘great’ after its $22 billion writedown for lousy mortgage-backed securities. Not great enough. After rival Lehman Brothers was forced into bankruptcy in September, Chief Executive John Thain agreed to sell Merrill to Bank of America for $29 a share, or $50 billion. That was a 70% premium over the market price of $17 a share but well below the $48 a share the government of Indonesia and Davis Select Advisors paid when they pumped $6.2 billion into Merrill in December. Merrill’s fate wasn’t a total surprise, however. Our story cautioned that Merrill still carried on its balance sheets $90 billion in dicey loans and squirrelly derivatives.
Oh, well, all right then. Excellent ass-covering there, Forbes.
Everyone makes a mistake, you say? Maybe, until one remembers that it was precisely this kind of reflexive business-press boosterism—in which all ties go to Wall Street—that helped land us here.
The Journal gave us a nice inside look at negotiations between Merrill and B of A, making clear how active the government’s role was in pressuring Lewis to stick to the deal.
And a few days later, the Times further crushed Thain’s reputation as a manager and exposed the flimflammery cooked up by Republican PR veteran Margaret D. Tutwiler:
Ms. Tutwiler quickly scheduled a series of interviews for Mr. Thain from Merrill’s trading floor. As the cameras flashed, he shook hands with the troops. When the cameras left, so did Mr. Thain.
‘He went on a series of speeches all over the world. He was being called a hero. The press was incredible,’ remarked one Merrill Lynch executive. ‘What was not happening was that he was not meeting with Merrill people.’
This is pretty damning stuff. Furthermore, the piece takes aim at Thain’s financial strategies, very definitely suggesting that while he did inherit a horrendous situation his own choices were nonetheless in part responsible for Merrill’s continuing losses:
Several individuals familiar with the alt-A trades, as well as others involving bets on such things as interest rates and equity derivatives, say that these gambits contributed about a third of the firm’s $15.3 billion fourth-quarter loss. But a senior Merrill trader and a former senior Merrill executive contend that there were no ‘significant’ trading losses taken in the quarter. The former executive said that any investigation of the firm’s trading would support that fact.
Whatever transpired on the trading desk, Merrill was still contending with withering assets that predated Mr. Thain’s arrival. Despite the fact that Mr. Thain inherited these assets, Merrill insiders say they could have been hedged—moves well within Mr. Thain’s purview as head of risk management at the firm. Yet he never did so, according to three people who worked closely with him. An individual familiar with Mr. Thain’s thinking said that Mr. Thain didn’t believe hedges would have been effective.
To put it bluntly, what we read in this piece rendered the bulk of Thain coverage obsolete. It is one big “never mind.”
The financial crisis changes the whole game. Like Wall Street itself, the press doesn’t need to just tweak its old model, it needs to scrap it, and write a whole new one—one that doesn’t center on individuals but networks of institutions.