Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

“And if we were to raise more capital, we would continue that process of evaluating what alternatives we had and what made the most sense for us to do from a capital efficiency point of view.”

Thain’s answer might have made plenty of sense to himself, but having heard him repeatedly say, “We have plenty of capital going forward,” investors took it as a not-so-subtle hint, and the damage was done. Within seventy-two hours, Merrill was being described “as the most vulnerable brokerage after Lehman.”

For a single day John Thain had the job that he had wanted for his entire career: to be the CEO of Goldman Sachs. That day, unfortunately, was September 11, 2001. As the company’s actual CEO—Hank Paulson—was on a plane headed to Hong Kong when the attacks took place, Thain, the firm’s co-president, was the most senior executive at 85 Broad Street, Goldman’s headquarters, and somebody had to take control. (His other co-president, John Thornton, was in Washington, D.C., for a meeting at the Brookings Institution.)

Thain had always been certain that his destiny was to run Goldman himself one day. Over the Christmas holiday of 1998, he had taken part in—perhaps even instigated—the palace coup that forced Jon Corzine out and put Hank Paulson in charge of Goldman. At Robert Hurst’s Fifth Avenue apartment, Thain and Thornton had agreed to support Paulson. But they thought they had received an informal promise in exchange: Paulson said he planned to be the CEO for only two years as a transition until he could move back to Chicago, and then they expected the job to be bequeathed to them. With Corzine off skiing in Telluride, Colorado, they made their pact.

For Thain, a longtime lieutenant and friend of Corzine, it was a heart-wrenching decision, but backing Paulson—whom he genuinely believed would make a better leader than Corzine—enabled him to advance his own career. As the person closest to Corzine on the executive committee, Thain was the one to have to break the news to him, and he was forced to watch as his boss fought back tears. Goldman partners, many just back from vacation, received a terse e-mail from Paulson and Corzine on the morning of January 11, 1999: “Jon has decided to relinquish the CEO title.”

But after two years passed, Paulson showed no interest in stepping aside as he realized how much work he still had to accomplish and was unsure about whether his successors were up to the task. Thain, like any senior Goldman partner, had become outrageously wealthy, accumulating several hundred million dollars in stock from the IPO, but he realized that his boss wasn’t going anywhere soon, and his dream of running Goldman would remain just that. Thain and Paulson got along well, but there was now an underlying tension. Thain resented the fact that Paulson hadn’t stuck to what he thought was their agreement, while for his part, Paulson questioned whether Thain, whom he respected as a talented financier, had the sound judgment to be CEO. He was also bothered by Thain’s un-Goldman-like displays of wealth. Though Thain was in many ways understated—he never appeared in the society pages, for example—he bought a ten-acre property in Rye and owned five BMWs. Paulson was also irked by Thain’s vacation rituals: While normally a hard worker, Thain was always determined to take a two-week trip to Vail at Christmastime, a week over Easter, and then another two weeks in the summer. For a perpetual worker like Paulson, it was a tough pill to swallow. By 2003 it was clear to both Thain and Thornton that Paulson wasn’t going anywhere. Thornton, who by then had grown frustrated he had not been elevated, decided to leave. Soon after his departure, he took Thain out to dinner.

“You can’t rely on Hank’s previous words,” Thornton said. “If I were you, I’d be getting out of here.”

Only several months later, Paulson appointed a former commodities trader named Lloyd Blankfein to be co-president with Thain. The ascension of Blankfein, who was building his own power base at the firm, not just politically but through sheer profits, as he oversaw business that accounted for 80 percent of Goldman’s earnings, was a sure sign to Thain to begin looking for an exit.

Paulson was speechless when Thain marched into his office to tell him he was leaving to become CEO of the New York Stock Exchange. Thain subsequently went on to deserved success in the position.

Four years later, with the credit crisis deepening in the fall of 2007, several large banks started taking huge losses and firing their CEOs. Thain was a natural candidate for firms looking for an upgrade. (Indeed, he had been considered for the position not just at Merrill Lynch but also at Citigroup, along with Tim Geithner.) He debated with himself—and with his wife, Carmen—about whether he would take the Merrill job if it was offered to him. He had done his own due diligence on the firm’s books and was satisfied that, despite the roughly $90 billion in shaky loans and derivatives on its balance sheet, it was manageable. But more than that, he saw it as an opportunity to be a CEO of a major brokerage firm—to get the job he had never landed at Goldman. Given his contacts and reputation, he also saw Merrill as a platform from which he could beat Goldman at its own game. He judged the effort to be at least a five-year project; he told Merrill’s board it would take him two years to fix the balance sheet and another three to take the firm to the next level. He eventually accepted the position and was paid a $15 million signing bonus and a $750,000 annual salary. The board also granted him options that would amount to another $72 million if he could bring Merrill’s shares above $100; they rose 1.6 percent to $57.86 on the news that Thain would come on board but still had a long way to go for that bonus to kick in.

As soon as he arrived, he moved quickly to shore up Merrill’s capital base, hoping to move a step ahead of the problem. His frame of reference was the end of Drexel Burnham Lambert, Michael Milken’s firm, which had filed for bankruptcy in 1990. “The demise of Drexel was really a liquidity problem,” he said at one of the firm’s Wednesday-morning risk-committee meetings, explaining how the firm didn’t have enough cash on hand. “Liquidity is the most important thing.” In December and January, Merrill raised $12.8 billion from the sovereign wealth funds Temasek Holdings of Singapore and the Kuwait Investment Authority, among other investors.

At the same time, he went about dismantling the O’Neal empire. When he first arrived, he noticed that the security guards at Merrill’s headquarters just across from Ground Zero always kept an entire elevator bank open exclusively for him. Thain walked over to one of the other elevators, and the moment he entered, all the employees shuffled out. “What’s the matter, why are you getting off ?” he asked. “We can’t ride the elevator with you,” the employees told him. “That’s crazy, get back in here,” he said, as he instructed security to open up the elevator bank for everyone. He also went about slashing costs by selling one of the firm’s G-4 planes and a helicopter. No target was too small: The freshly cut flowers that were costing the firm some $200,000 a year were replaced with silk ones.

At the same time—in a paradox that was not lost on his staff—Thain began spending serious money on talent. In late April, with the approval of Merrill’s board, he hired an old friend from Goldman, Thomas K. Montag, as his head of trading and sales. To lure him away, the firm agreed to a signing bonus of $39.4 million, even though Montag wouldn’t begin work until August. In May, Thain would hire Peter Kraus, another Goldman man, whom he guaranteed a $25 million golden parachute.