John Thain comes clean

By Felix Salmon
October 7, 2009
Financial News has a quote from John Thain, at "a speech this month":

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Financial News has a quote from John Thain, at “a speech this month”:

“To model correctly one tranche of one CDO took about three hours on one of the fastest computers in the United States. There is no chance that pretty much anybody understood what they were doing with these securities. Creating things that you don’t understand is really not a good idea no matter who owns it.”

This is the same man, of course, who, during his tenure as CEO of Merrill Lynch, would repeatedly take a large writedown, raise capital, and say that his marks were conservative and that there would be no further writedowns or capital-raisings. And then of course he’d be back with more a couple of weeks later. Certainly Thain tried his darndest as CEO to give the impression that he knew exactly what his CDO holdings were worth, and that Merrill understood them very well. So I guess he’s now saying that he was lying?

Still, I’d like a bit more color on the “correct model” that Thain is talking about. Which computer does he have in mind? And how much faith does he have in the results? It’s hilarious to me that even after everything he’s been through, Thain thinks that if only we had more computing power, we might not have been in this mess. More likely, we’d be in an even bigger mess.

Update: The Q&A session at Wharton from which the quote was taken can be found in PDF form here. (Thanks, Cardiff!)

Update 2: John Carney points out that in January 2008, Thain seemed a bit less sure of himself when it came to how much all those CDOs were worth. But that call, on January 17, came in between a statement on January 15 saying that he was “certain that Merrill is well-capitalized”, and a statement on January 18 that he was “very confident that we have the capital base now that we need”. (Of course, any further writedowns in the CDO book would directly hit Merrill’s capital base, so statements that Merrill’s capital was safe were tantamount to statements that there wouldn’t be any further CDO writedowns.)

Later on in the year, Thain continued in this vein:

“…Today I can say that we will not need additional funds. These problems are behind us. We will not return to the market.” (March 8 )

“We have more capital than we need, so we can say to the market that we don’t need more injections. (March 16)

“We have plenty of capital going forward, and we don’t need to come back into the equity market… No more capital raising; I’m sure we have enough capital.” (April 4)

“We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market.” (April 8 )

“We are well-capitalized. We’re comfortable with our capital position.” (June 11)

“We are in a very comfortable spot in terms of our capital.” (July 17)

How could he be so sure, if no one had a clue what Merrill’s enormous CDO book was really worth?

Given the size of Merrill’s CDO exposure, and the degree of uncertainty which Thain now claims was endemic to that exposure, it seems incredible that Thain could have been so certain about the amount of capital that Merrill needed. Of course, in retrospect all his claims about needing no more capital were wrong: the losses would never end, even after Merrill was taken over by Bank of America. As he now admits, the CDO book was so opaque that Thain had no grounds for being so cocky.

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