When John Thain told that Maria Bartiromo that he didn’t expect that “complete breakdown in the functioning marketplace itself,” he was telling the truth. After the Merrill merger with Bank of America was first announced back in September and Congress approved the TARP, Thain clearly expected that the markets would settle down.
“We should start to see unlocking of the credit markets,” Thain said in October.
As you know, that didn’t happen. You can argue that Thain should have known that the bailout would not “unlock” the markets as planned. But Thain wasn’t alone in making that mistake.
This does raise a question about the much discussed rumour that Merrill had put on some trades in November and December that went badly wrong. Thain has denied this, blaming the losses on “legacy positions.” But if Thain really believed the credit markets were about to unlock, wouldn’t he have directed his guys to trade on this position?
Of course, it’s always possible Thain was very conservative even as he expected markets to return to normal correlations. But it does at least cause us to raise a sceptical eyebrow.