Well before the financial crisis, John Thain was a major player on Wall Street. Thain was a long-time Goldman Sachs employee and was Jon Corzine’s (#13) veritable shadow during the crisis negotiations regarding Long Term Capital Management (LTCM) in September 1998. He was Goldman Sachs’ chief operating officer (COO) when Goldman went public in May 1999, and survived the purge when Henry Paulson (#38) won the power struggle with Corzine for control of Goldman. However, it was only when Thain was named chairman of the New York Stock Exchange (NYSE) in 2004 that he became more widely known to the investing public. Thain replaced Richard Grasso as chairman of the NYSE. Grasso had started at the New York Stock Exchange (NYSE) as a clerk in 1968 and by 1995 rose to become chairman. As a result of the spectacular collapse of formerly high flying companies like Enron and WorldCom due in large part to accounting fraud, as well as the nearly 80% fall in the NASDAQ from its March 2000 peak, the Securities and Exchange Commission (SEC) pursued a variety of corporate governance reforms. Included in these reforms was increased transparency concerning executive compensation. Consistent with these reforms, in August 2003 the NYSE was forced to announce – admit is a better word - Richard Grasso would earn $140-million in 2003 and was owed another $48-million in deferred compensation. Coming in the wake of the tech bubble bursting, and given the fact that the quasi-public NYSE only made $28-million in 2002, Grasso’s pay seemed more than a little excessive. Apparently, upon hearing of Grasso’s NYSE salary one of the NYSE board members – who should have been more knowledgeable about his chairman’s pay – thought it was a typo!
The most obscene aspect of Grasso’s salary was not its magnitude, but the obvious conflict of interest that was latent in it. The NYSE board set Grasso’s salary, but the NYSE board was comprised of employees of companies that were regulated by Grasso and the NYSE. To everyone outside of Wall Street, the fact that someone having no obvious special talent, like Richard Grasso, could be paid $188-million for one year’s “work” by the companies he was responsible for regulating appeared to be a clear cut case of quid pro quo, or you scratch my back and I’ll scratch yours. Of course, with the enormous firestorm of controversy swirling around the size of his salary, Grasso’s days at the NYSE became numbered and he was forced to resign. After Grasso was forced to resign, the NYSE was forced to look for a new chairman. In a case of going from the ethical frying pan and into the fire, in early 2004 the NYSE selected Goldman Sachs’ John Thain as its new chairman.
While he was firmly ensconced as NYSE chairman, John Thain was fortunate to avoid the sub-prime mortgage related chaos that was wreaking havoc up and down Wall Street. Not as lucky in this regard was fellow Harvard MBA alumni and CEO of Merrill Lynch, Stanley O’Neal (#37). On October 30, 2007 and following in the wake of both billions of dollars in losses and a clumsy attempt at merging with Wachovia, Stanley O’Neal was forced to resign by Merrill’s board. In this case “forced” is a relative term because as part of this forced resignation O’Neal took home $161.5-million in retirement benefits. On November 14, 2007 and just two weeks after Stanley O’Neal’s forced resignation, Merrill Lynch announced that Thain had been hired as its new CEO.
Much can be gleaned about John Thain and the prevailing Wall Street culture by evaluating what he did almost immediately upon being hired by Merrill Lynch. However, before discussing Thain’s initial actions at Merrill, it is first necessary to fully understand what was occurring at Merrill Lynch and throughout Wall Street at the time he was hired. As mentioned above, the previous Merrill Lynch CEO, Stanley O’Neal, had been forced to resign as a result of billions of dollars in losses. In January 2008 Merrill Lynch would announce billions more in losses, and Merrill’s total losses in the financial crisis would ultimately exceed $56-billion. Looking forward a few months, in April 2008 Merrill would announce a layoff of 10% of its employees.
Problems such as these were not limited to Merrill; other large banks also suffered billions of dollars in losses. In November 2007 Citigroup announced billions of losses in sub-prime mortgages – which of course prompted Robert Rubin’s infamous (#41) “side role” comment. In December 2007 - and as a result of investor concerns surrounding AIG’s credit default swap business - Wharton professor Gary Gorton (#27) as well as senior AIG executives Joseph Cassano (#9) and Martin Sullivan (#44) discussed the “high level of comfort” that Gorton’s models gave AIG in their credit default swap business. Of course, as events transpired the concerns of investors were fully justified, and the losses incurred by AIG in its credit default swap business exceeded $50-billion. In this atmosphere of staggering losses and soon to be massive layoffs at both his company and industry wide, one of the first things John Thain did upon being hired as CEO of Merrill Lynch was to spend over $1-million to redecorate his office. You can’t make this up.
Included in the redecoration effort was a $35,000 “commode on legs” and a $1,400 trash can. However, in Thain’s defense he did have the good taste to use the same decorator - Michael Smith - that Barack Obama hired to redecorate the White House. To be sure the money Thain spent in redecorating his office is not even a rounding error in Merrill’s financial crisis related losses of $56-billion. Indeed, Thain’s redecorating costs were not even a large fraction of his 2007 salary of $83-million - which according to the Associated Press - was the highest earned by any CEO that year.
Focusing on the cost of the redecorating work misses the fundamental aspect of what is most at fault with it. The most damning aspect of Thain redecorating his office was not the cost to do so, but the defective mindset that judged it a reasonable action. What type of person in a leadership position would dedicate any of their limited time and energy to such a trivial task when so much important work obviously needed to be done? Whatever the ultimate answer to this question, it should be clear that the type of person who would do such a thing is completely ill-suited for a leadership position.
See Jay Light (#34) for the perspective of the dean of Harvard Business School’s on the role that leadership failures played in the financial crisis but who somehow remains completely ignorant of the enormous role his school played in these leadership failures. (Thain’s MBA is from Harvard.)