Former Merrill Head John Thain Defends Wall Street Compensation

The man made famous for lavish corporate spending explains why ‘bonus is a bad word’

John Thain leaving the New York attorney general's office in 2009. (Photo: AP) John Thain leaving the New York attorney general's office in 2009. (Photo: AP)

No questions about $35,000 commodes or $87,000 rugs, but John Thain — chairman and CEO of CIT Group and former CEO of Merrill Lynch — had plenty to say about the 2008 crisis (of which he was a central figure), Wall Street compensation, the Fed, the “London whale” and much more.  

Thain told Bloomberg Television on Tuesday that there was “too much fragmentation and insufficient transparency in the stock market and that dark pools should be eliminated.”

Thain, who infamously spent $1.2 million on redecorating his office as Merill foundered, went on to speak about bank compensation, saying that good risk management requires attracting and paying for top talent and that "the problem is bonus is a bad word these days."

Thain on why he believes a 2008-style crisis could 'absolutely' happen again:

"Well if you look at hundreds of years of markets, there have always been periods of time when you get overexuberance, you get overleverage. You get bubbles of some type, and then those bubbles burst. And there's nothing that would lead you to believe that that can't happen again. There's a great book written by Kindleberger on manias, panics and crashes, and it chronicles crashes and manias and panics over a couple hundred years. And it's just – it's the type of things that markets are susceptible to.

"We're right now in a post-bubble period. And the post-bubble period tends to be safer. Leverage is lower. The lending environment is more conservative. And we're seeing economic growth, but weak economic growth. And so you don't see excesses right now in the system, but over time as people get more confident, and in particular as money remains very, very cheap, there is certainly a risk you get another form of a bubble."

On the London whale and whether regulators are really equipped to regulate the big banks:

"Well the London whale [who cost JPMorgan billions in trading losses] was a very different thing. It wasn't a loan. It wasn't lending. So the very complicated financial institutions when they're trading in very complicated instruments, which those were, that are a much more difficult question for the regulators. In terms of pure lending, they can get their handle on — on loans to leveraged institutions."

On whether those in risk management get paid enough or are respected enough that they can actually be influential:

"So I think this is a really good question, and it depends a lot on the financial institution. As you know, one of the jobs I had in the past was at Goldman Sachs. I was the CFO, and all of the risk management reported to me. Goldman had a unique philosophy of emphasizing risk management just as importantly as the risk takers … And so if you emphasize it correctly, if you take the most talented people and if you pay them, you can make risk management just as important as risk taking."

On Wall Street compensation:

"The problem is bonus is a bad word these days. And so people don't like the concept of bonuses. So think about it differently. Think about it as variable compensation. It has to be better to have variable compensation so that you can adjust compensation for the performance of the person, for the performance of the business, for the performance of the company. Because if you just had fixed compensation, which you could do, you could just pay people fixed amounts, but then you don't have the flexibility that the variable compensation gives you."

On whether anyone actually institutes clawbacks in a real way:

"So JPMorgan is the perfect example. They are in fact, to my understanding based on what I read in the press, clawing back money from the traders who lost that money. So they are in fact going to do that, and that's a good thing.

"So first of all, if you use equity as a substantial portion of people's compensation, you do tie them to the shareholders. And so if they cause big losses or cause the failure of an institution, they will suffer along with their shareholders. That’s a different question when you get to the taxpayers and should the taxpayers be supporting these financial institutions. But from a shareholder point of view, if you use a lot of equity, you do in fact line up your employees. And if you tie it to long-term performance, along with clawbacks, you do in fact get better alignment."

On how he would fix the stock market:

"The biggest problem is the fragmentation. So you can trade stocks in 50 different places. There's no transparency in most of those places. That's not good for the market. That's not good for retail investors….One of the things you could do though is force transparency. So you have to have much clearer pricing and so you can see the…"

On whether he would eliminate dark pools:

"I would…I think that would go a long way. And then allowing stocks to trade in their primary market and have that primary market control when they trade. So for instance, part of the problem has been if you have a stoppage on the New York Stock Exchange, at least historically that didn't necessarily stop trading other places. And that causes a lot of volatility."

On what the NYSE's value is:

"Well, it's a number of things. First of all, it is a great brand, and it's also a symbol of America's marketplace. It's a listing venue where the most prestigious companies in the world are listed there."

On whether he has more faith in the futures market than in the cash equities market:

"No, it's not a question of faith. It's a question of the profitability model of the marketplaces. So, as I said, you can only trade futures in one place. You can't trade it in 50 places. The value of the New York Stock Exchange, and you see this in whenever there's something unusual. So opens, closes, some unusual event or somebody makes a mistake. The fact is a person can catch a mistake that sometimes the computers don't."

On whether he sees Federal Reserve policy as a big risk:

"Well I think it's a risk. It's not such a big risk right at the moment because, as I said, leverage is still relatively low and the lending standards are still relatively good. And so you haven't really seen the erosion in standards or quality, and you haven't seen leverage go up that much, but that's certainly a risk as people push out on the — on the curve to try to get more yield."

"I don't think it's the same as it was pre-crisis. So I don't think you’re seeing as much leverage as in 2007. I don't think you're seeing as risky deals, but it is tending that way particularly on bigger deals, much less so in the middle market."

On what kind of impact the Fed taper will have on middle markets:

"So I think that the market is overestimating the impact of the taper. We know that the Fed's been buying these securities. We know that they've been artificially pushing down long-term interest rates. That's got to change. It can't last forever. The market is already anticipating the reduction in the taper. Long-term rates are already higher. It's the short-term rates that are going to stay low, and that's what really drives the economy."

On whether Fed stimulus is addictive:

"I don't think so. I think that the Fed will simply slow down their buying. As I said, long-term rates already are anticipating it. They'll go up. The curve will get steeper…I think the market will be fine without it." 

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