One on One with Merrill Lynch CEO John Thain
Thursday, January 17, 2008
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SUSIE GHARIB: No breaks for Merrill Lynch shares today; they tumbled 10 percent after the financial giant reported a huge quarterly loss and write- down. Merrill lost nearly $10 billion in the fourth quarter or $12.01 a share. That's more than double what analysts were forecasting, and compares to a healthy gain in the same period a year ago. The largest U.S. brokerage firm wrote off about $17 billion in failed investments, much of those in sub-prime mortgages and related bonds. Still, Morningstar analyst Ryan Lintell says in terms of sub-prime related write-downs, the worst is over for Merrill.
RYAN LENTELL, ANALYST, MORNINGSTAR: The market definitely wanted to see a kitchen-sink quarter and then to get these write-downs behind them, so we can focus on the actual core business at Merrill and their earnings going forward and don't have to worry about what write-downs are coming. And hopefully, we've put those behind us.
SUSIE GHARIB: More now on Merrill's big quarterly loss and that massive write-down today. A short while ago, I talked with Merrill's new chairman and CEO John Thain. My first question, will Merrill need to take more write-downs?
JOHN THAIN, CHAIRMAN & CEO, MERRILL LYNCH: We still have risk and we're still in a trading business. We're on our trading floor right now. So you can never say that there wouldn't be any further write-downs. But given where the CDOs (ph) are marked and you can see there was a very significant reduction from their carrying value in September to the end of December. They have mostly IO interest only value at this point, so they don't really have very much downside any more.
GHARIB: John, if there are going to be more write-downs, what range can we expect, $5 to $10 billion more or less?
THAIN: No, no, you know, our net exposure right now is $4.8 billion. And we don't really expect there to be further write-downs. We raised $12.8 billion of capital. We believe we've more than filled the hole. As you know, we lost $8.6 billion after tax, so we raised significantly excess amount of capital than we lost and we're now well capitalized to go forward into 2008.
GHARIB: Do you think, though, that you may need to raise more capital down the road and if so, will you go back to those same foreign investors?
THAIN: No, one of the things we wanted to do was to raise the capital up front, raise it in front of the earnings and then be out of the equity capital market. So no, I don't think we're going to need more equity capital. We are well capitalized. We did get all of our ratings reconfirmed today from all of the rating agencies and we're in actually very good shape going forward.
GHARIB: What about selling any of Merrill's current businesses?
THAIN: We did sell ML Capital or most of the assets of ML Capital. ML Capital was the middle market lending business. It really wasn't strategic to us, so we did sell that. We sold most of it right at the end of '07. And then we also sold our insurance business. Going forward, there really are not other pieces that we're looking to sell. Blackrock is a strategic part of our business. We have no intention of selling that. And we own 20 percent of Bloomberg which we carry on our balance sheet at zero. And you know, it's worth probably $5 billion. But we're not intending to sell that either.
GHARIB: John, I know you have been CEO for less than two months. But as you've had a chance to look over Merrill's businesses, what would you say is the key issue that you need to address?
THAIN: We had to get the risk in the mortgage, mortgage-related areas down. We had to repair the capital base that had the problem and so put ourselves in a well capitalized position. We had to change the risk management function so we're changing the reporting structure of risk. And then we're changing the philosophy on risk management.
GHARIB: What are you doing to manage risk differently?
THAIN: We have a weekly risk committee meeting. The heads of the businesses go to that. And we're not going to have the same risk profile where you can risk the earnings not only of the entire company. We don't want them to be risking 100 percent of the earnings of their businesses. Risk should be sized appropriately, monitored, managed and we're still in the risk-taking business. But it's really keeping the risk under the appropriate level of control.
GHARIB: How are the problems stemming from sub-prime impairing the rest of Merrill's businesses?
THAIN: You know what is interesting about that is they are not. So as I said, the wealth management business had a great quarter, a great year. Banking had a great year. Trading businesses had a great year. So really the problems in sub-prime are isolated just to the mortgage and mortgage-related part.
GHARIB: As you know, Citigroup announced this week thousands of layoffs to solve its financial problems. Do you see Merrill considering any layoffs going forward?
THAIN: We're not looking at any significant layoffs. We have looked at our employee base. And in the fixed income area, over the last year we did reduce fixed income by about a thousand people. That was mostly in the mortgage origination side so in the first Franklin and those mortgage originators. There might be a little bit more to do. But we're not looking for significant head count reductions.
GHARIB: Yesterday JPMorgan CEO Jamie Diamond said that he is open to doing an acquisition. If Jamie calls you and says he wants to talk about a merger, what would you say?
THAIN: Well, I respect and like Jamie very much but we're not interested in that. I think our business mix and our franchise is very strong. We don't need to buy someone. We certainly don't need to be bought. And we are really going to focus on running our business.
GHARIB: Let's talk a little bit about Merrill's stock. It's down sharply, not only today, but it is half of where it was since May. What do you need to do to get investors interested in Merrill Lynch again?
THAIN: I think they already are interested. We saw that from the capital raising we just did. We could have raised twice as much money in the mandatory convertible structure. We actually turned money away. We size people down. And there was just a lot of interest in investing in the franchise. But look it, I think our job is to prove the earnings power of this franchise over a longer period of time. If we -- since we have the capital, since we have the business mix, if we produce good earnings over the course of the next few quarters, our stock price will do fine.
GHARIB: John, thank you so much. And good luck to you on everything.
THAIN: Thank you very much.
