Thain the Next Casualty?

When he made the first statement I said he was putting the noose around his neck. Now Merrill Lynch’s (MER) John Thain just joined the list of execs who made statements regarding their firms fiscal well-being only to go back on them a few months later. Will his fate be the same as theirs?

Let’s go back. In April Thain said ““We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market in the foreseeable future,” realizing he just was very vague he later clarified it to say “through issuing additional equity”.

Less than a month later he reiterated that his company would not need additional funds. At the time I said he had nothing to gain and everything to lose in the situation since no oe would believe him anyway, why say it at all?

Two months later in an effort to raise more capital Merrill announce they would shed valuable assets (Bloomberg). Even this was worse than raising it through equity I said as it permanently impairs earnings power while an equity dilution can be undone over time.

Now comes news that Merrill will issue $8.5bn share offering and $5.7bn in additional write-downs from the sale of mortgage securities only 10 days after they reported a $4.6bn Q2 loss that included $9.4bn writedown, and announced the previously discussed asset sales aimed at raising an additional $8bn.

The CDO sale is shocking as Merrill said it would sell CDOs valued at $30.6bn to Lone Star Funds. At the end of Q2, the bank had estimated the value of the CDOs at $11.1bn. The securities are being sold for just $6.7bn, or about 22 cents on the dollar.

Thain clearly did not have a clue back in April when he opened his mouth.
Nor in May when he followed it up…..

It remains to be seen what happens but the mes Thain has put himself into rivals that of Chuck Prince at Citi (C), Ken Thompson at Wachovia (WB), Stan O’Neil at Merrill (MER) and Erin Callan at Lehman (LEH). All made promises that turned out not just to be wrong, but spectacularly so.

Disclosure (“none” means no position):Long WB,C, none

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