John Thain was the latest of the cast of Wall Street bigshots who pointed an accusatory figure at outsiders while presiding over a company whose balance sheet was so upside down that it was basically a zombie–a dead company stalking the markets, threatening to turn other financial companies into zombies as well.
Thain insisted back in September that his company was far healthier than the markets believed. It was the work of short sellers and wrong-headed ratings agencies, Thain said.
Shortly after John Thain agreed to sell Merrill Lynch to Bank of America, Thain held a townhall meeting to explain the sale to Merrill employees. It was in a speech to them that he blasted short sellers and the ratings agencies.
Jed Horowitz told the story well back in September:
Mr. Thain was nevertheless clearly bitter about the circumstances, and he fingered such ratings agencies as New York-based Moody’s Investors Service and Standard & Poor’s for Merrill’s plight, all but accusing them of dereliction of duty.
“In their infinite inability to have any intellectual rigour to their analysis,” the firms have been basing their credit ratings on companies’ share prices rather than on careful review of their balance sheets, he said to a loud round of applause. That creates a vicious cycle in which a declining stock price is viewed as a loss of confidence from credit counterparties that then leads to an actual downgrade, “which of course then makes it more difficult with your credit counterparties and harder to raise capital,” Mr. Thain said. Hedge funds, knowing how the ratings agencies act, are actively shorting the stocks of Merrill and other financial institutions, he said.
Downgrades earlier this summer required Merrill to put up millions of dollars of additional collateral to support derivatives trades and also push up the cost of raising additional debt.
We now know that Merrill Lynch was even sicker than the ratings agencies or short sellers predicted. Thain either didn’t know the financial condition and prospects of his own company or was willing to lie about it. Either way investors and employees are better off now that the man who so badly misled them has lost his job.