In a move that unites two prominent casualties of the financial crisis, CIT Group Inc. (NYSE: CIT) ended a prolonged search by naming John Thain, the former chief of Merrill Lynch & Co., as its new chairman and chief executive officer.
Thain, who left Bank of America Corp. (NYSE: BAC) 13 months ago amid controversy over its takeover of Merrill, will have his hands full rebuilding CIT, an embattled commercial lender that nearly collapsed in 2009.
CIT still operates under restrictions that were imposed after receiving $2.3 billion in funding under terms of the Troubled Asset Relief Program (TARP). Those measures include being banned from the commercial paper market, its traditional source of funding.
"If he can pull this off, he's going to be the king," Brian Charles, a debt and equity analyst with R.W. Pressprich & Co., told Bloomberg News in an interview.
Thain, 54, will assume his duties at New York-based CIT immediately, following another former Merrill Lynch executive, Jeffrey Peak, who led the century-old firm from July 2004 until Jan. 15, 2010. Peek was ousted after he crippled the company with ill-fated forays into subprime lending and student loans, which led to a federal bailout and bankruptcy reorganization.
Thain was fired by Bank of America CEO Kenneth D. Lewis after the giant bank acquired Merrill during the credit crisis in 2008.
Thain was criticized for a plan to pay top executives $3.6 billion in bonuses even as Merrill's losses ballooned to $27.6 billion. Thain has said Bank of America was aware of the bonuses and was kept informed about the losses.
New York Attorney General Andrew Cuomo, filed a civil fraud case last week alleging that Bank of America, Lewis and former Chief Financial Officer Joe Price deceived investors and taxpayers in 2008 by hiding losses at Merrill Lynch before shareholders got to vote on the takeover, and used those losses to extract more bailout funds from U.S. regulators.
The lawsuit claims that "from the moment the merger was announced, Merrill was transparent with Bank of America management about the losses Merrill was incurring," Bloomberg reported. Lewis and Price have denied the charges, and lawyers for Bank of America have called the allegations "totally without merit."
Thain, who remained relatively untouched by investigations of the takeover process, said the lawsuit "stands on its own and I'm glad that the truth has come out."
For Thain, the new job marks the chance to resurrect his career after a fall from grace.
"It has been a difficult year," he told The Wall Street Journal Sunday.
CIT is also trying to execute a turnaround, having emerged from bankruptcy protection in December after losing more than $6 billion in 10 consecutive quarters.
Despite his controversial background, people with knowledge of the hiring process think his battle-hardened experience will serve Thain well as he guides CIT through rough waters.
"If you take someone with a long-term proven record as a winner who's gone through a tough patch, I know as an investor I always want to bet on that person," Jeffrey Aronson, a CIT investor who co-heads Centerbridge Partners LP and took a lead role negotiating CIT's restructuring last year, told The Journal.
CIT, with a workforce of 4,480 employees at the end of September, provides business loans to more than 3,000 companies and is the third-largest railcar-leasing and aircraft-financing firm in the U.S., according to its Web site.
After the short term credit markets dried up last summer and the Treasury refused to give it more TARP funding, the company nearly collapsed. But bondholders-including Centerbridge, Oaktree Capital Management LP and Capital Research & Management-came to the rescue with $3 billion in loans.
All totaled, CIT eliminated more than $10 billion of debt during the bankruptcy and bondholders came through with $7.5 billion in loans.
CIT is now seeking to have government regulators lift restrictions on its banking unit as it searches for lower-cost sources of funding. In order to access deposits as a source of cheaper funding for loans, the company wants to transfer its small-business lending, trade finance and U.S. vendor finance operations to its Salt Lake City-based banking unit.
That move will be impossible unless Thain can get the Federal Deposit Insurance Corp. to lift a "cease and desist order" it has placed on that business, he said in an interview with Bloomberg.
Thain said in the interview that he wants to spend the first couple of months reviewing CIT's businesses and putting a management team together.
He went on to say that CIT represents an opportunity to focus on the main problem facing the American economy as it struggles to recover from the worst financial meltdown since the Great Depression.
"This is a company that's over 100 years old and its core business is lending to small- and medium-sized companies," Thain told Bloomberg. "If we're going to get the U.S. economy to continue to grow, if we're going to create jobs, then we need to have this kind of a company do well."
News & Related Story Links:
CIT Names Ex-Merrill Chief John Thain to Run Lender
- Wall Street Journal:
Merrill's Ex-Chief Is Back, Atop CIT
- Money Morning:
Bank of America's Lewis Says Paulson, Bernanke Forced Merrill Takeover
- Money Morning:
Bondholders the Big Winners as CIT Files for Bankruptcy