Regulation To Boost Costs And Cut Profits

Investment banks' invitation to borrow at the Fed's discount window will ``come with a price tag,'' Gross wrote on Pimco's Web site today.

Leverage and gearing ratios of securities firms will in a few years resemble those of commercial banks - resulting in reduced profitability for major houses.

Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. will earn less and face higher borrowing costs because of increased regulation of investment banks, Pacific Investment Management Co.'s Bill Gross said.

These banks will likely be forced to raise expensive capital and/or reduce the bottom line footings of their balance sheets.

This will be costly, and bond spreads as well as stock prices should begin to reflect it.

Bloomberg – Fed Rules to Cut Wall Street Profits, Boost Costs, Gross Says

Guardian - New Capital Raising To Be Costly For Banks

John Thain… The Fixer

To be offered one of the toughest jobs on Wall Street is an opportunity afforded to few; to be offered at two i-banks at the same time is extraordinary.

Citi-group and Merrill Lynch at the end of last year had one man’s name at the top of their short lists: John Thain, Wall Street’s “Mr Fix-it”.

In the end, the former co-president of Goldman Sachs turned down Citi and accepted the role of chairman and chief executive at Merrill.

His rivals say he picked the right job. “Citi still has big problems; Merrill is a simpler story and it is fixable,” said one.

Mr. Thain, who developed a reputation as a fixer at the NYSE, has wasted no time trying to repair the damage at Merrill.

It’s been nearly 70 days since he took on the job and so far he has managed to patch up Merrill’s wounds with more than sticking plaster.

He has tapped into the cash-rich sovereign funds to raise $13 billion in new capital. Now he says “We will not have to go back to the market to raise capital."

Mr. Thain disclosed $15 billion of sub-prime mortgage-related write-downs - the largest quarterly loss since the broker was founded 94 years ago. He accepts there could be more write-offs, but says they are unlikely to be on the same scale.

He has also overhauled risk management, to ensure the same mistakes are never repeated.

He said he wants every part of the bank thinking about its actions, and the likely knock-on effects of other parts of the bank

Now he wants to focus on rebuilding the firm. He is trying to find ways to further exploit growth opportunities in its international wealth-management and banking businesses as well as explore the synergies between them.

“In terms of growth, we will focus our opportunities outside America because that’s where the world’s economy is growing. If you exclude our high-net-worth business, about 60% of our revenues are already generated overseas,” he said.

The plan is to expand wealth-management operations as well as the equities and fixed-income arms further into the Middle East, Russia, India, China and Brazil.

Mr. Fix it is likely to focus on China, but Merrill has to apply for a licence to operate there, a process that it is about to start.

Another area where Thain wants to concentrate is operating as a single firm across the group. The biggest implication of this is how staff would be remunerated?

“Over the last few years Merrill had moved to compensating people more on their individual businesses and I want to move towards paying them on the basis of how well the firm does first and also paying them using equity so they have a longer-term perspective,” he said.

He takes a dispassionate view of the financial meltdown on Wall Street. He said: “We won’t overreact to that, we’ll be prudent in managing our expenses but we want to maintain our strategic direction.”

As credit issues begin to surface on all forms of consumer lending, from auto loans to credit cards and in consumer lending. Thain is not predicting a quick cure; he foresees a wave of lawsuits as people seek compensation for their losses and problems in the capital markets.

Go to Article from Times>>

Further read >> John Thain on His New Job as CEO of Merrill Lynch

If he can manage to steer Merrill back on course in the first half, and if the economy comes right again in the second half, as Fed chairman Ben Bernanke predicts, then he and the bank should be in a good position to sail full steam ahead.

Merrill to Shut Down Subprime Lending Unit

Merrill Lynch plans to wind down most of its First Franklin subprime mortgage lending unit, CNBC reported.

The move could result in the elimination of 400 to 500 jobs starting next week, CNBC said.

Merrill would reportedly keep First Franklin’s loan servicing business, which could perform well in the current mortgage and housing markets.

Merrill, which ceased originating subprime mortgages on December 28, on Monday said it was “evaluating continued involvement in this market.”

Merrill, the nation’s largest brokerage house, bought First Franklin from National City, a bank based in Cleveland, in December 2006 for $1.3 billion to expand in a business that had generated big profits for rivals like Lehman Brothers.

The deal closed just before the subprime mortgage market began to collapse.

On Monday, Merrill Lynch disclosed in its 10-K annual report that last year it cut back on subprime home lending, mortgage purchasing and extending credit facilities to other lenders.

Merrill reported mortgage-related losses and write-downs totaling $24.4 billion in 2007. The annual report shows that Merrill still has significant exposure to risky home loans and related assets.

Full story At:

http://www.nytimes.com/reuters/business/business-merrilllynch.html?_r=1&dlbk&oref=slogin

Merrill Execs Get Stock, Not Cash, For '07

Feb 1, 2008 - Merrill Lynch & Co. is offering stock-option grants to some high ranking officials instead of bonuses for 2007. The Management in its SEC filing says these retention options "promote the continuity of the management team as they continue to navigate through challenging market conditions in 2008."

Greg Fleming, president and COO, received 1.2 million retention stock options. Robert McCann, vice-chairman and president of global wealth management was awarded 971,346 special options and Rosemary Berkery, vice-chairman and general counsel, received 593,600.

One third of the retention options will become exercisable on or after January 28, 2010, with the remaining exercisable two years from now only if specified stock price targets are achieved. Half, if the stock closes at an average of $80 a share over any 15-day trading period, and other half if the stock closes at an average of $100 a share over any 15-day trading period.

John Thain, who stepped in as CEO in December in the wake of Mr. O'Neal's departure, received a nice initial pay package when he agreed to take over as CEO in November. It's valued at anywhere from about $50 million to as much as $120 million if Merrill's stock goes up $40 from where it was when he was hired. On NYSE yesterday, Merrill shares fell $1.38 to $56.09.

John Thain in Jan-08 has promised to overhaul the bank’s bonus system following record Wall Street pay-outs, despite huge losses.

Merrill’s executive chairman said one of his first initiatives would be to rework the bank’s pay system. “We are going to move toward a compensation system based more on how the whole company did, then on how the individual business did, then how the individual did.”

But Mr. Thain also said “It’s basically an impossible situation. Most of our businesses had very good or record years. The huge losses were created by a small number of people.”

I question the reasoning behind these payments.

• Does Merrill really have to keep them?
• How is Merrill going to balance with individual performers VS performance of company as a whole? Ultimately it comes down to the simple fact that financial system rewards people for taking extravagant risks.
• It looks like Fleming won't be receiving a bonus, that’s an encouraging sign but what about huge package former CEO Stan O'Neal left with? Merrill Lynch, paid $100 million in the last two years as a result of the massive profits the bank made during the subprime housing bubble. When the bubble burst, Merrill Lynch suffered massive losses which eliminated the earlier gains. O'Neal, however, won't be giving any money back.
• Merrill Lynch chief executive officer John Thain wants to change compensation system. The problem is he trying to close the stable door after the horse has bolted?
• Further more, stock options give executives an incentive to strive for great results. But they do not adequately punish bad results because, if the share price falls by a little, the value of the option is zero; but if the share price falls a lot the value is still zero.
• Some companies will no doubt argue that they have to offer extravagant pay packages to attract top management talent. That's fine, but it underscores Shareholders say and a need for government intervention.
  
  
  
  
  

John Thain say's Merrill “very well positioned” for growth in 2008

Despite a $9.8 billion fourth-quarter loss, Merrill Lynch chief executive John Thain said his firm is “very well positioned” for growth in 2008.

Mr. Thain gave his optimistic assessment for the New York-based firm during an interview at the World Economic Forum in Switzerland on Jan. 25, Bloomberg reported.

``The market volatility has been very good for our business,” said Thain in the interview.

“Merrill Lynch is looking to grow in markets including Brazil, Russia, India and China.”

Thain has replaced senior executives and taken steps to replenish capital during the past month by raising $12 billion from outside investors.

Thain joined Merrill Nov-07, replacing Stan O'Neal, whose gamble on building the subprime- mortgage business backfired as U.S. homeowner defaults surged to a 20-year high.

Mr. Thain also appointed Noel Donohoe to be the firm’s co-chief risk officer on Jan. 17 to work alongside Edmond Moriarty.

On Jan 28, Merrill Lynch & Co Co-President Ahmass Fakahany was set to resign. Fakahany oversaw Merrill's market risk management from March 2005 until May 2007, when he was named co-president with Greg Fleming, a star investment banker at the company.