The full transcript of John Thain’s recent speech at Wharton provides a fascinating glimpse into the mindset and perspective of the fallen Merrill Lynch leader.
Thain says that it’s sad that the crisis had led to the demonization of the American Dream, and he doesn’t want to personalise it, but he will:
I grew up in a small town in the Midwest. I had never been to the East coast. My friends in high school pump gas, sell insurance or are in jail.
One of the root of the problems, Thain says, is that Wall Street was securitizing mortgages and, as the credit quality deteriorated, made more complicated structures until no one understood them.
The best evidence of this was that some of the Wall Street firms — including Merrill Lynch, which created a lot of these things when it became more and more difficult to sell them — thought it would be just perfectly OK to pile them up on their balance sheet. That turned out to be a very, very bad idea.
But hey, rating agencies and regulators are also to blame, he says.
Worse, Thain says there were ABS CDOs and CDO squared, “derivatives created out of derivatives,” which there is no chance that pretty much anybody understood what they were doing with these securities.
The degree of complexity that was created in the securities, and the lack of anybody’s ability to really understand how they were going to perform, was simply an error and a bad thing. The fact that the firms that created them were stupid enough to own them doesn’t make me feel any better.
And that’s why Thain agrees with on of the proposals in discussion: requiring lenders to keep some equity of the mortgages.
About that infamous September weekend, Thain says that he tried to negotiate four things: the price, the bonuses, the (now controversial) materially adverse change clause and… “the fourth one doesn’t really matter.
He goes on to give details “just for fun” on the bonus negotiations that put BofA in legal quandaries (hey, the guy isn’t really in trouble anymore).
When we agreed in September, it was supposed to be 60% cash, 40% stock. They asked us to change it to 70% cash, 30% stock, which we did. We ultimately changed $5.8 billion to $3.6 billion because we were trying to at least reflect somewhat what was happening both in the market as well as at Merrill. They asked us to use their stock instead of Merrill stock. So it’s a little interesting in January when they claim they didn’t know anything about these bonuses since we used their stock to pay them. And basically when I got fired in January — when they said John Thain secretly accelerated these bonuses — they were lying.
He is pretty pessimistic for the future, as over the next year, the biggest risk to a recovery in the financial system is CRE, the “biggest kind of concentration of risk that hasn’t yet been recognised.”
Asset prices there have fallen even if a lot of the equity holders don’t want to recognise it. As debt comes due, it’s going to be very hard to refinance it.
He also dropped a few words about remodeling his office and the trouble it led to.
We reconfigured the office so that it was like a normal office where you could have guests and have meetings. And we decorated it in kind of the style that Merrill Lynch offices, which were very, very nice.
Now, in hindsight that was a mistake. All right? I admit that was a mistake. I didn’t know the world was going to explode, but it did. So I still recommend — if you’re going to go to a financial institution in difficulties — just go to IKEA or keep the furniture that’s there.
Asked about his thoughts on Ken Lewis, he says: “It’s tempting to answer that. But I’m not going to.”
Finally, asked about how he spends his time and whether he has professional plans, Thain says that he hasn’t been playing golf, cause he doesn’t like it. He hasn’t been going to charity events because he hates them, but he does a lot of “charitable work.”
He also encourages the students in the audience to do like Bette Middler and plant trees in Manhattan, or do just like him, and build hospital baby units.
Because “making the world a better place is something special.”
Read the entire transcript:
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