The sub- prime mortgage-related problems that have roiled the credit markets for several months are mostly over, according to Merrill Lynch CEO John Thain, but US financial institutions with large consumer-related exposures will be 'the next problem area' as the US economy weakens. In an interview with BT, Mr Thain pointed out that Merrill Lynch - the world's largest brokerage firm and a major investment bank - would not need to raise any additional capital and is in the process of revamping its risk management and employee compensation systems.
And with 60 per cent of its investment banking and sales and trading business outside the US, Merrill remains bullish, particularly on Asia, which 'has some of the best opportunities in the world'.Mr Thain, formerly the head of the New York Stock Exchange, who took over as CEO of Merrill Lynch last November, said that although the sub-prime-related credit woes had largely passed, the US economy 'will go through a difficult period' because of falling home prices, rising food and energy prices, and rising unemployment.
'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,' he said.
This slowdown 'won't impact Merrill so much', he added. 'The next problem area will be those financial institutions who have large exposures to consumer-related debt - home equity loans, auto-loan receivables, credit-card receivables. And they would be primarily regional US banks.'
Merrill Lynch, which was badly hit by the US sub-prime crisis in the second half of 2007, has raised a total of US$15.5 billion in new capital since the beginning of this year. Singapore's Temasek Holdings was among the investors in Merrill, and holds a 9.4 per cent stake.
Mr Thain said he did not foresee Merrill having to raise any further capital. 'Right now, our equity capital is US$44 billion, which is just a little under its record high,' he said.
Merrill's stock price - which had been pummelled down from US$94 on May 18 last year to a low of just under US$40 on March 28 this year - has since recovered to US$52.71 at the close of trading last Friday.
Mr Thain indicated that among the changes he is making at Merrill since taking over the helm is a revamp of both the risk management and compensation systems. 'We will change the risk management culture,' he said. 'Risk now reports directly to me.'
In the area of compensation, he pointed out: 'There were too many silos, where each of the trading desks was focused only on their own P&L (profit and loss) 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 as a whole does.'
Equity will also make up a higher proportion of employee compensation, he said. 'When you give people stock, they participate on both the upside and the downside. And that's a very important element in aligning the interests of management and shareholders.'
Mr Thain, who is in Singapore en route to India, was bullish on Merrill's Asian business. 'The Asian part of our business is the fastest growing and has some of the best opportunities in the world,' he said.
He cited Singapore, India and China as the three Asian countries on which Merrill is most focused.
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