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

And then there was his office. He and his wife had decided it was badly in need of a renovation. O’Neal’s white Formica furniture didn’t match the rest of the Merrill decor, and an adjacent conference room had been turned into O’Neal’s personal gym, complete with an exercise bike and weights. Thain hired celebrity interior decorator Michael S. Smith (whose clients included Steven Spielberg and Dustin Hoffman) to renovate his office, the adjoining conference space, and the reception area, including repainting, carpentry, and electrical work. Thain didn’t pay much attention to the details, focusing mainly on the fact that Smith had happily brought over his favorite desk from his old office at the NYSE. But Smith billed the firm $800,000 for his services and submitted an itemized list of goods that included an $87,000 area rug, a $68,000 credenza, and a $35,115 commode. The executives in the billing department who cut the checks, however, were so aghast at such profligacy that they made copies of the receipts, which they would later use against him.

For all Thain’s efforts to improve morale, he seemed to be achieving precisely the opposite. On the trading floor, “39.4”—a sly reference to Montag’s bonus—became a popular way to punctuate a sentence instead of using an expletive. While Merrill executives praised Thain for his prescient efforts to raise capital, there were grumblings that, as a manager, he was either too much of a micromanager or more likely the opposite, too detached. When he hired a new chief of staff, May Lee, he neglected to mention it to certain of the firm’s top inner circle. On her first day on the job, she took her seat at an executive committee meeting with all of them. Robert McCann, who ran the firm’s brokerage business, walked into the room, noticed the stranger, and looked at Thain quizzically. “Oh, I probably should have told you,” Thain said matter-of-factly, “this is my new chief of staff.”

He also rankled some executive committee members with his grandiose media appearances, in which he cast himself as the great savior of Merrill. He brought in Margaret Tutwiler, a former State Department spokeswoman in G. H. W. Bush’s administration, to run communications. Within the firm some thought he might be angling for the Treasury secretary post if John McCain, the Republican front-runner, was victorious.

By that June 11, when Larry Fink made his enraged call about BlackRock, it had become clear that the capital that Merrill Lynch had raised from Temasek and KIA, the sovereign wealth funds, back in December, was still insufficient—and that those deals were proving to be much more expensive than they appeared at the time. Under their terms, the investors were entitled to additional payouts to compensate for any dilution in their holdings if Merrill issued new shares at a lower stock price. Merrill’s stock price, meanwhile, had slid steeply. To add $1 billion in new capital, the firm might actually have to raise an amount nearly three times that to compensate the 2007 investors. Thain could also see that the second quarter was shaping up to be worse than the first, though he didn’t know how bad it would ultimately be.

Merrill’s problems were by now becoming evident to others on Wall Street, feeding a perception that Thain did not have a solid grasp on the firm. As the banking analyst Mayo told Thain on the conference call that got him in trouble with Fink: “It’s kind of ‘Raise as you go’ is the perception, as you have the losses, you raise more capital. Maybe it’s more of a perception of the industry, if you disagree. At what point do you say let’s just get far ahead of anything that could come our way?”

“I don’t agree with the way you characterized it,” Thain replied. “We raised $12.8 billion of new capital at the end of the year, we only lost $8.6 billion. We raised almost 50 percent extra and so we did raise more than we lost. The same actually was true at the end of the first quarter, we raised $2.7 billion, versus the $2 billion we lost. So we have been raising extra.”

But that would not be enough.

Several weeks after Merrill’s board had named Thain CEO, he was faced with an especially delicate task. Placing a call to his predecessor, Stan O’Neal (who had just negotiated an exit package for himself totaling $161.5 million), Thain asked if they might get together. Hoping to keep their meeting out of the newspapers, the two decided on breakfast in Midtown at the office of O’Neal’s lawyer.

After a few pleasantries, O’Neal stared levelly at Thain and asked, “So, why do you want to talk to me?”

Thain knew that if there was one person in the world who could explain what had gone wrong at Merrill Lynch, why it had loaded up on $27.2 billion of subprime and other risky investments—what, in other words, had gone wrong on Wall Street—it was O’Neal.

“Well, as you know, I’m new, and you were the CEO for five years,” Thain said carefully. “I’d like to get your take, any insight on what happened here. Who everybody is, and all that. It would be very helpful to me and to Merrill.”

O’Neal was silent for a moment, picking at his fruit plate, and then looked up at Thain. “I’m sorry,” he said. “I don’t think I’m the right person to answer that question.”

O’Neal was out of a different mold than most of Merrill’s top executives, not least of all because he was African American—quite a change from the succession of white Irish Catholics who had headed the firm in the past. His was, by any measure, an amazing success story. O’Neal, whose grandfather had been born a slave, had spent much of his childhood in a wood-frame house with no indoor plumbing on a farm in eastern Alabama. When Stan was twelve, his father moved the family to a housing project in Atlanta, where he soon found a job at a nearby General Motors assembly plant. GM became Stan O’Neal’s ticket out of poverty. After high school he enrolled at the General Motors Institute (now known as Kettering University), an engineering college, on a work-study scholarship that involved his working six weeks on the assembly line in Flint, Michigan, followed by six weeks in the classroom. With GM’s support he attended Harvard Business School, graduating in 1978. After a period working in GM’s treasury department in New York, he was persuaded in 1986 by a former GM treasurer, then at Merrill Lynch, to join the brokerage firm on its junk bond desk. Through hard work and support from powerful mentors, O’Neal rose rapidly through the ranks. He eventually came to oversee the junk bond unit, which rose to the top of the Wall Street rankings known as league tables. In 1997 he was named a co-head of the institutional client business; the following year, chief financial officer; and in 2002, CEO.

The firm for which O’Neal was now responsible had been founded in 1914 by Charles Merrill, a stocky Floridian known to his friends as “Good Time Charlie,” whose mission was “Bringing Wall Street to Main Street.” Merrill set up brokerage branches in nearly one hundred cities across the nation, connected to the home office by Teletype. He helped democratize and demystify the stock market by using promotions, like giving away shares in a contest sponsored by Wheaties. More than the mutual fund giant Fidelity or any bank, Merrill Lynch, with its bull logo, became identified with the new investing class that emerged in the decades after World War II. The percentage of Americans who owned stock—whether directly or indirectly, through mutual funds and retirement plans—more than doubled from 1983 to 1999, by which point nearly half the country were investors in the market. Merrill Lynch was “Bullish on America” (an advertising slogan it first used in 1971), and America was just as bullish on Merrill Lynch.