By Mike Caggeso
A Wall Street investment bank yesterday (Thursday) upgraded its ratings on Merrill Lynch & Co., Inc. (MER) after the company announced it filled its empty chief executive officer slot with John Thain, CEO of the NYSE Euronext (NYX).
Credit Suisse Group (CS) raised its rating of Merrill Lynch shares from "Neutral" to "Outperform," predicting that Thain's steady hand is exactly what the embattled lender needs to rebound from the subprime market fallout.
Other analysts praised also the move. Citigroup Inc. (C), which also ousted its CEO recently, was reportedly considering Thain as a candidate, too.
"Thain is the absolute best possible candidate, as he brings experience that is both deep in years and functionally broad," Fox-Pitt Kelton said in an analyst's report, cited by MarketWatch.
Before Thain's time at NYSE, he was president and chief operating officer at Goldman Sachs Group Inc. (GS).
Thain's first day at Merrill Lynch will be Dec. 1. He takes over for ousted CEO E. Stanley "Stan" O'Neal.
In an interview on CNBC TV, Thain declined comment on future Merrill write-downs, but he did say that the banking industry likely faced three to six months' worth of additional losses from subprime mortgages and collateralized debt obligations (CDOs).
"I don't think we've seen the bottom," Thain told CNBC. [For a related story on the continued write-downs by the banking sector in today's coverage, please click here].
Merrill is unlikely to get out of fixed-income businesses, such as mortgages and underwriting CDOs. The reason: They are attractive and profitable businesses if the risks are managed closely, Thain said.
"You have to take measured risk," he said during the interview with the widely watched cable TV network. "That's fine. It's a question of how you size that risk."
Punk Ziegel & Co. banking analyst Richard Bove, one of the few analysts who has repeatedly made the correct calls about the problems facing the U.S. financial-services sector, called Thain's hire "a big plus" for Merrill because the executive has the ability to solve the company's key problem: risk management. Thain also has a reputation for never having dodged making tough personal decision.
Even so, Bove noted in a research note he penned yesterday (Thursday), "Mr. Thain is not a miracle worker and the markets Merrill serves must improve before the stock becomes a 'Buy'."
Bove is well respected because he always tells both sides of a story, and doesn't gloss over the negatives at the companies he covers. Indeed, he highlights them for clients and investors.
So despite Thain's reputation and generally solid record, Bove said, it's important to note that earnings actually declined during the executive's last two years at Goldman Sachs. Nor was Thain able to reverse, or even stem, market-share losses at the NYSE.
"In sum, [as] considerable as his abilities might be, he has been powerless to reverse major trends in the business in which he operates [no one can]," the analyst wrote.
"In sum," Bove concluded, "we like the company and the new manager. I do not like the markets."
News and Related Story Links:
- Money Morning:
The Merrill Lynch "Surprise" Fuels More Subprime Uncertainty.
Wall Street analysts applaud new Merrill CEO.
- Money Morning:
O'Neal Finally Out at Merrill Lynch.
Merrill Lynch Taps NYSE's Thain as New CEO.