In Friday's New York Times, Floyd Norris struggles to capture exactly what Merrill Lynch & Co.'s John Thain did this week. Did he panic? Did he capitulate in a sweaty paroxysm of desperation? Did he cave in to fear? Is Thain not having fun anymore, like he seemed to be having at Davos when he spoke to Norris? (Ah, Davos, only six more months to go.) And why won't he return calls? (The fact that Merrill is in a quiet period while it tries to raise $8.5 billion doesn't seem to matter.) Norris does reach beyond Thain's personal state of mind to wonder whether all that fear he envisions sloshing around Merrill may mean the stock market bottom has been reached. He doesn't know, but maybe.
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This may be overly harsh on Norris, a veteran financial reporter in a world with too few of them. The column reflects the Times' retail needs: the emphasis on El Capitain's state of mind, on the stock market and on the attempt to explain to Times readers how collateralized debt obligations work. And Norris is honest enough to provide relevant caveats about the big CDO sale and its relation to other firms: that CDOs differ; that we don't really know anything about the composition of Merrill's CDOs; that different firms with different CDOs in different situations may go their own way. In the end, Norris admits, maybe Thain's move will represent the bottom, making him, well, if not a hero, at least the guy who called the bottom.
Norris adds to the babble on the Thain move. The initial reaction to Thain's big sale was: Why didn't he do this earlier? Why didn't he and his brethren on Wall Street see clearly enough and show enough guts to dump their lousy mortgages and move on? The subtext always is: They didn't sell because they're greedy. The answer, as always, is more complicated. They could have sold at once and taken a smaller loss. But they couldn't all unload at once, not only because that would destroy whatever market was out there, but because there wasn't enough capital to replenish them all. All of Wall Street would been in the Fed's ER. Moreover, no one could see that this crisis would drag on for so long. They weren't necessarily convinced that all mortgages are, by definition, toxic. And, yes, if they could hold on, they might avoid a huge loss, or even make a few bucks.
Norris offers the opposite view -- the fear as opposed to greed theme. He's suggesting that Thain chickened out and sold in a panic. Norris' subtext is that he should have had the guts to hold on, at least for a better deal, although he also hints that he thinks that now Wall Street should follow (but probably won't, although Reuters is reporting today that Lehman is thinking of unloading $30 billion in mortgage assets). But if we don't know what's in those CDOs, we really don't know the factors behind the decision to sell to Lone Star. Thain has made missteps -- he should stop predicting -- but he does strike one as rational. What was happening within Merrill to lead to the sale? What pressures did Thain feel, perhaps unique to Merrill? Were the brokers tired of explaining write-downs? Were there regulatory pressures?
The truth is, both the fear and greed camps want to argue with hindsight and tend to view every firm and bank as roughly the same. The winner of all this will be the firm or fund that can hold on the longest and ride the bounce. Thain obviously realized it wouldn't be Merrill. - Robert Teitelman
