Merrill reps applaud hiring of Thain

For brokers at Merrill Lynch & Co. Inc., the nightmare may be ending.

With John Thain taking control next month, and former chief executive E. Stanley O’Neal out the door, Merrill reps said the firm should be set to address its problems with mortgage-backed securities and end the distractions that have detracted from a successful retail business.

Mr. O’Neal resigned three weeks ago after the New York firm announced $8.4 billion in write-offs on mortgage-backed bonds and bad loans for the third quarter.

Mr. Thain’s appointment is “a huge positive for firm,” said a Merrill rep in the Southwest, who asked not to be identified.

Mr. Thain, chief executive of New York-based NYSE Euronext, is credited with modernizing the New York Stock Ex-change and, as a former president and chief operating -officer at The Goldman Sachs Group Inc. of New York, he has extensive risk management experience.

“We were rudderless. We just needed somebody of repute” to take over, “and I think [Mr. Thain] has that,” said a Merrill rep in the Northeast, who asked not to be identified.

Industry observers agree.

“If you look at some of issues going on [at Merrill], there’s probably not too many better choices” than Mr. Thain, said Larry Tabb, a consultant for institutional firms and the founder of TABB Group LLC in Westborough, Mass.

“From the broker’s standpoint, if [Mr. Thain] can clean things up, show [retail] some respect and get out of the way, it’s fine,” said Danny Sarch, founder of Leitner Sarch Consultants Ltd., a White Plains, N.Y., recruiting firm.

The recent bad news “could be our most successful failure,” a Merrill producer in New England said: “A year from now, we’ll all probably be pretty happy that we went through this turmoil.”

Mr. Thain’s honeymoon among the retail sales force, though, may not last long.

If he is to succeed, Mr. Thain must quickly take control of the mess at Merrill caused by weak risk controls, while showing the retail troops that the individual-investor business will no longer be treated as a second fiddle to the institutional business, many brokers believe.

The fundamental question with which Mr. Thain will have to contend, said the rep in the Southwest, is: “Have they cut this [subprime] cancer out yet?”

The reps’ concerns are magnified by their large stock holdings in their deferred-pay plans.

“A lot of [Merrill] guys have so much stock, and they’ve never divested any of it,” the Southwest rep said.

A Merrill rep in the Southeast, who asked not to be identified, said his colleagues have a lot of stock that will vest at the end of 2010 and 2011 due to the strong years prior to 2001.

Mr. Thain has “got to do something really good with the stock,” the rep said. “Once those two years are out, there’s not a whole lot holding people in … He’s got some time, but he needs to make significant progress.”

Brokers would also like to see Mr. Thain upgrade the company’s board of directors. Producers at the firm question the board’s lack of oversight prior to the subprime-related mess, deride Merrill’s vesting of Mr. O’Neal’s deferred pay and wonder why no transition plan was in place.

Mr. Thain understands the asset-backed-securities business and has a strong risk management background, Mr. Tabb said. Risk management is more a part of the culture of Goldman Sachs than at some competitors, he said.

Brokers at Merrill also like the fact that Mr. Thain has a record of running growing businesses both at Goldman and NYSE Euronext. They hope that once the immediate issues are addressed at Merrill, Mr. Thain will look at ways to build the firm.

“The guy is totally connected, so he should be able to [hire] some of the best and brightest,” said the Southwest rep.

At the New York Stock Exchange, Mr. Thain was able to challenge entrenched interests, cut costs and “embrace the future,” Mr. Tabb said.

In contrast, Mr. O’Neal was seen primarily as a cost cutter.

Although brokers applaud the board’s relatively quick hiring of Mr. Thain, many Merrill reps wanted to see the company maintain tradition by choosing a chief executive from its own ranks, preferably someone with a background in retail.

“A lot of old Merrill brokers long for the old days when an old broker was running things,” said the Southwest rep.

But it could be worse.

“At least [Mr. Thain] is not from GM,” said the Northeast rep, referring to Mr. O’Neal’s background as a financial executive at General Motors Corp. of Detroit.

Retail “will be an area he’ll have to grow into,” Mr. Tabb said.

And Mr. Thain isn’t completely lacking in experience with individual investors.

“He’s dealt with the Goldman Sachs private-client side,” said the New England rep. “I lost a client to him once at Goldman Sachs … He helped one of the [Goldman] private-client guys” in landing the account, the rep said.

“[Mr.] Thain will have more respect” for retail, the Northeast broker said. “He’s going to see that the retail side is fine, that we’ve done a good job.”

Brokers would like to see Merrill’s head of retail, Robert McCann — reportedly one of the candidates for the top spot — be assigned a more prominent role in the firm.

He and Dan Sontag, head of Americas client relationships for Merrill’s wealth management unit, “are the face of retail,” said the Southwest broker.

Both men are generally well thought of by the troops.

Dan Jamieson can be reached at [email protected].