Merrill Lynch hires NYSE chief as CEO

NEW YORK -- The news ended speculation about who would succeed Stanley O'Neal, who lost his job two weeks ago and at that time was the highest-profile executive casualty yet of the subprime mortgage meltdown.

Wall Street's initial reaction was good: Merrill shares rallied as news of Thain's appointment spread Wednesday, closing up $1.03 at $57.98.

In reaching outside its own management ranks for the first time in its 97-year history, Merrill named a CEO known for his expertise in risk management. Thain, 52, a graduate of MIT and Harvard Business School, spent most of his career at Goldman Sachs before taking over as CEO of the NYSE in January 2004.

At Merrill, Thain inherits a leading brokerage firm that recently got dragged down by the meltdown in subprime mortgages. Like most of its competitors, the firm bolstered its profits in recent years by investing in securities composed of subprime mortgage loans.

And like many on Wall Street, Merrill didn't measure the risk of those investments accurately. On Oct. 24 Merrill reported a $2.3 billion third-quarter loss because the deteriorating subprime market forced it to write down $7.9 billion — 75% more than it had said just weeks earlier. Six days later O'Neal resigned.

While there's no guarantee that Merrill won't have more subprime-related losses, the arrival of a risk-management expert on the scene heartened some.

Richard Bove, a bank analyst at Punk Ziegel, applauded the move, saying that most of Merrill's operations were profitable. "What's completely screwed up is risk management," he says. "John Thain's strength is that he's a cerebral guy who comes from Goldman Sachs, and he understands risk management extraordinarily well. He's exactly the right guy for the job."