John Thain

Crisis, redemption and bubbles

John Thain Bloomberg
Mr. Thain, a long-time Wall Street banker, warns that new asset bubbles may be forming.
  • Why it matters

    Why it matters

    If financial regulators can find the right balance, growth will be possible while evading the danger that people and institutions break rules.

  • Facts

    Facts

    • Global markets have fallen sharply since the start of this year, and the price of oil has fallen to just over $30 a barrel.
    • Politicians in the United States have called for financial risk to be reduced by breaking up larger banks.
    • In December, the Bureau of Labor Statistics announced 292,000 jobs were created in the United States, where unemployment is at 5 percent.
  • Audio

    Audio

  • Pdf

John Thain hasn’t moved far. The office tower of Bank of America, the bank that let him go in 2009, sits nearly wall-to-wall with his new employer, CIT Group, in Manhattan’s Bryant Park.

Mr. Thain was fired by Bank of America just months after he had engineered the sale of Merrill Lynch, one of the biggest headline-grabbing moves of the global financial crisis. Convincing the powerful BofA to buy Merrill Lynch made Mr. Thain one of the saviors of the 2008 crisis by helping Wall Street stave off an even deeper collapse.

But he didn’t do Bank of America any favors, as the bank would soon find out when it opened up Merrill Lynch’s balance sheet, which had run into deep trouble in the run-up to the crisis. Mr. Thain, who led Merrill Lynch from December 2007 to the start of 2009, was let go soon afterwards. His public reputation suffered greatly because of it.

That was just one chapter in Mr. Thain’s illustrious career, which included a long stint at Goldman Sachs and three-year term as head of the New York Stock Exchange. Since 2010, he has served as chairman and chief executive of CIT, a financial institution with a $65-billion balance sheet that was in bankruptcy protection when he took it over.

It’s a career that has given him deep insights into the structures and operations of Wall Street. In an interview with Handelsblatt, Mr. Thain offers his view of the financial markets today, on the still-remaining risk of too-big-to-fail banks, and on a crazy U.S. presidential election cycle that has left his own favored candidate – Jeb Bush – struggling to gain traction.

He also looks back over the key decisions of his career: without anger, but also without much regret.

 

Handelsblatt: Mr. Thain, the start of the year has been pretty turbulent for global markets. Could a hard landing in China trigger a crash in Europe and the United States?

John Thain: There’s no question that China has an enormous influence on the rest of the world, it’s the world’s second-largest economy. What’s going on in China impacts markets and impacts business around the world. I don’t think that China is going to have a hard landing. Its growth is slower but it’s still an economy that’s growing at a faster rate than most of the rest of the world.

With a slowdown feared in China, the oil price has also collapsed. Should we be worrying about a wave of bankruptcies in the energy business? Some providers in the United States won’t be able to survive without higher prices.

There’s a lot of focus on this right now and it’s not only oil. It’s also the price of gas. Certainly the price declines are having an impact on a lot of the oil field services companies, as well as the owners of the reserves. Everyone is focusing on this: What is each financial institution’s exposure? What are they doing about it?

How deeply is CIT caught up in this area?

We answer this question on every single one of our earnings calls. Our total energy exposure is about $1 billion. We’re a $65-billion institution, so as a percentage of our overall exposure, it’s relatively small. And it’s collateralized and we spend a lot of time looking at it on a loan-by-loan basis. If oil stays where it is, there will be more pain and there will be more bankruptcies in the oil services sector. I expect the credit quality of our portfolio will deteriorate if energy stays where it is and I expect all of the lenders in the energy space will see deterioration in their credit portfolios.

It’s certainly possible that there are asset bubbles being created. The problem with financial crises is they don’t come back in the same way as they did in the past.

There are also geopolitical risks, the international situation is less stable than it has been in a long time.

There are very significant geopolitical risks in the world right now, the situation in the Middle East and failed nations in Iraq, Afghanistan, Syria and Libya as well as the problems with the Israelis and Palestine. That’s a risk in terms of terrorism and in terms of commodity prices. Europe is also an area of concern. With the leadership that Angela Merkel has provided in Europe in the refugee situation, the question is, how much of a risk is that to her continued leadership? Her decision to open the borders does not seem to be supported by most of the European countries.

So, you are concerned about Europe sticking together if Ms. Merkel’s role as a stability-anchor fails?

Yes, I believe that.

If there’s one bright spot at least in terms of the data, it’s the United States. You have full employment again. Still, many Americans feel the country is still in crisis.

The United States is not in crisis, the U.S. economy is growing but it’s growing slowly, 2-percent GDP growth is not great but it’s not terrible. The reason that people don’t feel better about that is that there’s been very little wage growth, particularly in the middle class.

Do you worry the U.S. Federal Reserve might choke off this fragile growth as it starts raising interest rates?

I don’t worry about that, the Fed has been very cautious. Most people would say they have been slow to raise rates and I would expect them to continue to be cautious.

What’s the mood among your customers?

We mostly lend to middle-market companies and they are the core of the U.S. economy, they create two-thirds of all net new jobs in the United States. Their outlook is similar to my view of the U.S.: They’re cautious, they see growth but they’re not willing to add a lot of expenses.

What about loans? Is it easy for companies to get credit?

Coming out of the financial crisis, there was always this debate about whether there was a lack of credit, and I believe it was much more the lack of demand. Credit is available today, it’s really about the lesser willingness of companies to add debt to their balance sheets. That’s particularly true of middle-market companies; bigger companies have not been anywhere near as restrained.

What’s stopping companies?

They would say there are three things that are holding them back. There are taxes – corporate taxes in the U.S. are one of the highest in the world. We need corporate tax reform, unfortunately that’s not likely to happen until we have a new president. The second thing is that their healthcare costs are continuing to rise, and third is the regulatory cost of running their businesses. And the outlook for the economy is not great.

But many companies don’t seem to pay any taxes at all?

That’s true for the biggest companies, but that’s not true for the middle-market companies.

 

JohnThain-GettyImages
John Thain’s short career at Merrill Lynch ended soon after he engineered the investment bank’s sale to Bank of America. Source: Getty Images

 

You have said that the availability of cheap money was one of the key causes of the financial crisis. Now we have had even cheaper money for even longer. Are you concerned about financial stability?

There’s no question the banking system is safer than in the past. They have more capital. But there is a lot of lending that’s being pushed out of the banking system so that it’s harder to see – in the shadow banking system, in business development companies or inside hedge funds. You also see the prices of commercial real estate at very, very high levels. It’s difficult to see that being sustainable. So it’s certainly possible that there are asset bubbles being created. The problem with financial crises is they don’t come back in the same way as they did in the past. I think the next financial system will not come from the banks but from somewhere else. Certainly one of the places could be the shadow banking system.

Do you think we have the right amount of regulation now?

In my experience, regulation goes in cycles and after a financial crisis, you get a lot of regulation. Then, over time, it gets reduced. The regulatory world tries to overcompensate after a crisis and then it goes back to the middle, to the right amount and then eventually it gets relaxed and then we have a new financial crisis. I think we’re in the middle.

Have bankers really changed their behavior? Where are we since the crisis?

Some of the things that have come out since the financial crisis I would have thought were impossible, but I would have been wrong. The idea that people were colluding to rig LIBOR. Years ago if you had said to me that the banks are colluding to rig LIBOR, I would have said that’s impossible, that’s crazy. It’s the same with foreign exchange rates. The idea that people would think it’s okay to strip off the delivery instructions for wire transfers, it seems incredible that anyone would think that’s okay. So the breakdown in ethical behavior that was occurring was much greater than I thought. But it’s not just this industry. The idea that you would write a computer program to deliberately evade the emissions testing and put that in millions of cars – who ever would think that was the right thing to do? It is a problem the industry still needs to address. I absolutely understand people’s anger.

“Some of the things that have come out since the financial crisis I would have thought were impossible, but I would have been wrong.”

John Thain

What could the industry do, what could a boss do to make sure these things don’t happen in their company?

You have to set very high standards of behavior, you have to make sure you’re compensating people in a way that reinforces that behavior and deal with bad behavior very severely.

You personally were vilified during the financial crisis, what did you learn from the experience and how did you deal with it?

One of the things I learned is that sometimes the press doesn’t care if stories are true or not, as long as they make sensational headlines. It’s very frustrating sometimes when the press is only interested in a sensational story. There was a story about the bonuses that were paid at Merrill Lynch, that the bonuses were secretly paid, but everything we did was according to the contracts and known to all involved.

You had a long career, what do you regret from this time?

The biggest regret is having to sell Merrill Lynch to Bank of America. That was the only option that I had, there was really no choice to protect Merrill’s employees and shareholders. It was necessary. For doing that I got fired. That wasn’t a very good outcome for me but it was the right thing to do for the company.

You then made a fresh start. Did you want to redeem yourself?

What I say to people is, if you start at a bank that’s bankrupt, it can only get better.

“This presidential cycle, it seems incredible that some candidates could be doing as well as they are.”

John Thain

Bernie Sanders, the U.S. Democratic presidential candidate, is calling for banks to be broken up. Are they still too big?

Too big to fail definitely still exists, but it only applies to ten – plus or minus two – financial institutions. He does have a point about that. The problem is that it’s not just the U.S. financial institutions. If you want to compete with Deutsche Bank or HSBC, or UBS and Credit Suisse, you have to have these large global multi-product financial institutions. To simply say we’re going to break up Goldman Sachs or JP Morgen Chase, it means we don’t have a competitor to Deutsche Bank or HSBC, and I don’t think that’s the answer.

You need a global approach?

Which is not practical.

Which of the U.S. presidential candidates are a risk to business and the economy, and who could help it?

The good thing about the U.S. system is that there is a balance between the president and the Congress, and particularly there’s a balance between the Senate and the House of Representatives. No candidate, no matter how unqualified, can do too much damage because that balance between the House and the Senate and the president continues to exist, and that’s a very good thing. This presidential cycle, it seems incredible that some candidates could be doing as well as they are.

You mean Donald Trump. Do you think his rhetoric is dangerous to the Republican party? Or to the United States?

There’s no upside to commenting.

What do you think about Republican candidates calling for the Fed to be supervised more closely?

First of all, if you’re being attacked from the left and the right, you’re probably doing the right thing. Secondly, the independence of the Fed is very important and there’s no reason to change that.

Do you support a particular candidate?

The one I support isn’t doing very well, but I support Jeb Bush.

 

Moritz Koch has been Handelsblatt’s Washington correspondent since 2013. Frank Wiebe is a New York correspondent for Handelsblatt, covering finance policy. To contact the authors: koch@handelsblatt.com and wiebe@handelsblatt.com

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