JOHN Thain, the chief executive officer of brokerage and investment banking giant Merrill Lynch, talks to BT's associate editor Vikram Khanna about the crisis on Wall Street, the changes at Merrill and its prospects looking forward.
Mr Thain: Is very optimistic about growth prospects in the region and in particular, in Singapore. Merrill is looking at expanding its wealth management business as new wealth is being created in Asia.Q: Warren Buffett says the worst of the crisis on Wall Street is over. Do you agree?
A: First, let me say I wouldn't disagree with Warren on anything!
We're through with the sub-prime-related credit problems for the most part. But I still believe the US economy is going to go through a difficult period as a combination of falling home prices, rising food prices, rising energy prices and rising unemployment impacts the consumer and that will impact the real economy. So I still believe we're going to go through at least a couple of difficult quarters, more related to a slowdown driven by the consumer rather than the sub-prime related problems.
Q: How will this slowdown impact financial institutions, particularly Merrill?
A: It won't impact Merrill so much. The next problem area will be those financial institutions which have large exposures to consumer-related debt - home equity loans, auto-loan receivables, credit-card receivables. And those would be primarily the regional banks.
Q: Looking ahead, do you foresee further restructuring of US financial institutions?
A: We've been seeing that. Huge amounts of capital have been raised, and particularly, in the case of investment banks, leverage has been reduced. I think both of those are likely to continue.
Q: Do you foresee Merrill having to raise still more capital?
A: No, I don't. We've raised US$12.8 billion of common and mandatory convertible at the beginning of the year. That was about US$4 billion more than we lost in 2007. And we raised another US$2.7 billion of perpetual preferred. So, right now, our equity capital is US$44 billion, which is just a little under its record high.
Q: You are the first CEO of Merrill who has not been from within Merrill. What are the advantages and disadvantages of being an outsider?
A: I think you have to look at why I decided to come to Merrill and why they offered me the job. It's first the business mix, the strategy of Merrill. It has an excellent strategy - a combination of the world's best wealth management business and a world class investment bank and sales and trading organisation. That strategy is very powerful and makes a lot of sense.
There are great synergies between the wealth management business and the investment banking business. You take a company public, you sell it, the wealth management side can manage the wealth, the wealth management side also has great contacts who can provide new IPO opportunities, new M&A opportunities.
Merrill also has a very strong brand and a very strong culture. And it's a global business; we have a global footprint. The investment banking, sales and trading parts of the business are 60 per cent outside the United States.
So the combination of a very good set of businesses, a global footprint, a very strong brand and a very strong culture was what was attractive to me.
Q: How do you plan to change the corporate culture at Merrill in any way, if at all?
A: The culture is strong and it's a very good culture. The one place where we want to change that is inside some of the sales and trading businesses. There were too many silos where each of the trading desks were focused only on their own P&L and in many cases, were paid only on the basis of their own P&L. We're going to move towards a more company-wide focus. And so, compensation will be based on how well the company does as a whole does. We will also change the risk management culture. I brought in a new person, Noel Donahue, to co-head risk, and risk now reports directly to me. And so, the risk management functions and the focus on risk controls is also a change.
Q: You've worked at Goldman Sachs, where risk management was part of your job as CFO. Goldman has emerged from the credit crisis relatively unscathed. What did it do right that some other investment banks did not do?
A: One of the things Goldman did right was that it made risk management a very senior-level focus. The risk management functions were just as important as the trading functions. So there was a good balance between the two.
Second, the senior management, right up to the CEO, were very hands-on in understanding the business and understanding the risks of the business.
Third, Goldman's compensation philosophy has always been oriented towards the firm as a whole. Those three things enabled them to weather this difficult environment.
Q: How do you respond to the public outcry against the compensation policies of financial institutions, which many people say reward excessive risk taking on the upside, without imposing commensurate penalties on the downside?
A: You have to look at how compensation is done and what form it takes. I believe in employees getting a significant part of compensation in the form of equity. Actually, that's one of the other things we've changed at Merrill; we've increased the proportion of equity in people's compensation. When you give them stock, they participate on both the upside and the downside. And I think that's a very important element in aligning the interests of management with that of shareholders.
Q: Merrill has significant operations across several Asian countries. How do you see the prospects for your Asian operations?
A: The Asian part of our business is the fastest growing and has some of the best opportunities in the world. The wealth that's being created in Asia and the growth in Asian economies fits our business mix perfectly. As new wealth is being created, we want to expand our wealth management business. As economies grow, companies need access to capital, countries have infrastructure needs which need to be addressed, and that creates a lot of investment banking opportunities and sales and trading opportunities. So I am very optimistic about the growth prospects in Asia and in particular, here in Singapore.
Q: Which Asian countries are you especially focusing on at this time?
A: Certainly, Singapore is one. India is second and China is third. Singapore is one of our major hubs in the region. We also have a very strong presence in India. And China is a big focus because of its growth. We have strong presence there in terms of bringing Chinese companies to the international markets. But we don't have the licences we need to operate in the domestic market in China, so that's an important focus - that we get those licences.
Q: Merrill's advertising slogan is 'Bullish on America'. Are you bullish on America?
A: We're bullish on the world, and on the opportunities for both our wealth management business and our investment banking business. We are a global company, not just a US company, and I think there are great opportunities around the world.
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