John Thain, Ex-Merrill Lynch CEO: Too-Big-To-Fail Banks Could Face Fees

03/18/2010 05:12 am ET | Updated May 25, 2011

Ex-Merrill Lynch CEO John Thain today suggested that large Wall Street firms, not unlike the one he used to run, should be subject to new fees.

Ahead of this week's Financial Crisis Inquiry Commission hearings, former Merrill Lynch CEO John Thain emerged to speak with Bloomberg News about regulatory reform and compensation structures on Wall Street.

Thain indicated that the biggest, most complex of the too-big-to-fail financial institutions be subject to some sort of fee. But he was adamant that the fine would not be a "tax":

Well, I don't think taxation is necessarily the right way, but one of the things you could do is you could have a form of a fee for being too big to fail. You could actually charge them. And the bigger they are, the more complicated they are, the more you charge them.

Thain -- who after negotiating Merrill Lynch's merger with Bank of America was reportedly ousted by former BofA CEO Ken Lewis last year over controversial bonus payouts at the firm -- also discussed his ongoing job search ("I'm really looking at a broader range of opportunities"), disputed the efficacy of the Glass-Steagall Act, and said that Wall Street was already on its way toward reforming compensation.

On regulation of the financial industry, Thain was noncommittal, arguing that the "way to get at this issue" was to ensure "that the financial institutions have the right regulatory oversight, that they have the right capital structure." And he maintained his opposition to reinstating Glass-Steagall -- the legislation that required a division between commercial and investment banking institutions -- alleging that it hindered competitiveness:

If you look at the competitive landscape for the large financial institutions, they have to compete globally, and to be able to have a lending business as well as a securities business, I think, puts them in the best position to compete on a global scale.

And at least so far as pay packages go, Wall Street has not, Thain claimed, gone back to "business as usual." By shifting bonuses from cash to stock -- which he said "lines the employees up with the shareholders" -- banks are reforming their compensation plans. But ultimately, "the firms themselves have to compensate their people."

Watch the interview below (the full transcript follows):


DEIRDRE BOLTON, BLOOMBERG NEWS: All right. Lizzie, thanks very much.
Well, it may be a new year, but as you just heard the pressure on Wall
Street has in no way abated. Compensation, regulation, they are as
explosive topics as ever.

ERIK SCHATZKER, BLOOMBERG NEWS: This morning we're going to help guide
you through the minefield with the help of two of Wall Street's most
capable hands, John Thain, the former CEO of Merrill Lynch and NYSE
Euronext and Rodgin Cohen, the Chairman of law firm Sullivan & Cromwell.
John, Rodgin, delighted to have you both. Thanks for joining us.

Let's kick it off with this. Down in Washington we just heard a whole
lot from Washington, our reporters down there. Down in D.C. there's a
growing perception that it is back to business as usual on Wall Street.
John, from your perspective, isn't this the one thing Wall Street can least
afford right now?

JOHN THAIN, FORMER CEO, MERRILL LYNCH: Well, I think that Wall Street
has changed. You see the focus on compensation and the structure of
compensation and you are going to see bonuses that I'm sure will be multi-
million dollar bonuses, but they're going to be much more equity.

I think in many cases they will be primarily stock and that lines the
employees up with the shareholders. And the fact that that stock's going to
vest over multi-year periods of time and the fact that there will be some
form of ability to recoup the bonuses, I think Wall Street has started to

SCHATZKER: Well, that, without question is a big deal for people on
Wall Street, the whole liquidity issue, the fact that they aren't going to
get as much cash, but when people see that big number, people on Main
Street, and those are the people who are talking to the Congressmen, they
don't buy the idea that there's been real reform on pay. What do you do
about that?

THAIN: you know, I think that's a problem. I think there's going to be
no real answer to that. I think the numbers when they come out will be
subject to criticism and public outrage, but also, you know, the firms
themselves have to compensate their people. So it's going to be a balance.

BOLTON: You know, we heard from Lloyd Blankfein, right, saying no
one's going to be happy. I mean, the employees don't seem happy because
they got more stock versus cash than they wanted, and of course there's the
continuing mounting public outrage.

Rodgin, you and I have spoken about this in the past. I mean, does
Washington understand to what extent it's hard to run a competitive
business and does Wall Street understand how out of whack its salaries are
with the rest of the country?

hit the nail on the head. There's a problem of understanding on both sides,
and that's what is causing, frankly, so much of the disconnect and the

SCHATZKER: Rodgin, you know the people who are going to testify down
there very well, so does John, John Mack, Lloyd Blankfein, Jamie Dimon,
Brian Moynihan. What's the best thing that can come out of this financial
crisis inquiry commission? What's the worst thing that can come out of it
in your mind?

COHEN: I think the worst thing that can come out of it is a search for
villains, because if we vilify individuals we're going to miss the real
causes of the crisis. The best thing that can come out is, not
surprisingly, the converse, which is to make and conduct a meaningful
search for the real causes of what happened.

BOLTON: Is it a waste of time though? I hate to say that. I mean,
we've had so many people, so many big voices giving us details about what
caused the crisis. Do we need this now?

COHEN: I think it's actually a desirable approach to have a systemic
effort as opposed to rifle shot attempts. The people I know on the
commission are very responsible people I think are dedicated, committed to
what they're doing, so I think it could be a good idea.

SCHATZKER: John, very quickly, before we take a quick break, you've
watched your fellow CEOs testify over the course of this past year. Do you
get the feeling sometimes that it's just a kangaroo court down there?

THAIN: Well, I don't think it has to be, and I actually think that
what Rodgin said is absolutely right. If there really is an attempt here to
learn, to find out what we can do different to change some of the causes of
this financial crisis, I think it'll be constructive. If on the other hand
it is in fact just an opportunity to pummel the CEOs, then I don't think
it's a very good use of people's time.

SCHATZKER: All right everybody, stay tuned. We've got much more coming
with John Thain and Rodgin Cohen. We're going to ask them about Glass-
Steagall. We'll talk about the conspiracy theory around Goldman Sachs' as
well. We're taking a short break, back in just two minutes' time.




BOLTON: We are continuing our conversation now with John Thain, former
CEO of Merrill Lynch and Rodgin Cohen, Chairman of Sullivan & Cromwell.
John, I want to start with you. You're an ex-Goldman man. The Goldman
conspiracy is alive and well.

We were all just revisiting the "Rolling Stone" article comparing
Goldman to a giant vampire squid, sucking the blood off the face of
humanity or something like that. So I mean, thanks to Hank Greenberg it
seems like the conspiracy is alive and well. What do you make of Goldman?

THAIN: Well, you know, Goldman is a great place. It has a lot of very,
very talented people. Those people go on to do things beyond Goldman.
Obviously many things in the government, many things in public service. You
know, I think that's a good thing and all of this conspiracy theory is just

SCHATZKER: Rodgin, you saw the bailout process probably from more
angles than just about anybody else. It's quite breathtaking, in fact, and
as such, do you believe based on what you've seen that Goldman Sachs had,
let's call it, undue influence over anything that transpired over the
course of last fall when it came to saving Wall Street or in some cases not
saving Wall Street?

COHEN: I do not believe it had such an influence and there is a single
pivotal moment. Goldman Sachs was getting ready to merge with Wachovia in a
transaction which would have involved less assistance than Citi would have
received. And it was the fear of the Goldman connection that clearly
prevented that transaction from happening.

SCHATZKER: So that one incident is enough to dispel all these
conspiracy theories?

COHEN: Well, it is a very powerful incident and it is the one actual
demonstration of the relationship of Goldman to the government.

SCHATZKER: I want to shift back to Glass-Steagall, shall we, Deirdre?
Or at least to regulation, and we'll bring up the subject of Glass-Steagall
with you, John, because Barney Frank, the Chairman of the House Financial
Services Committee threw his support behind this movement to reintroduce
some kind of separation between commercial and investment banking just last

Based on what you've seen, what you've heard, does the financial
services industry need to start thinking about Glass-Steagall more in terms
of an eventuality that they're going to have to deal with and less about
fighting it?

THAIN: Well, I don't think so. If you look at the competitive
landscape for the large financial institutions, they have to compete
globally, and to be able to have a lending business as well as a securities
business, I think, puts them in the best position to compete on a global

SCHATZKER: But how do you persuade people like Barney Frank? He's in
an extraordinarily position, Chairman of the House Financial Services
Committee, that that's the case? Surely, I mean, he's an extraordinarily
intelligent man, as you know. He understands these dynamics. Is it just
Barney pandering to populism for the time being and then he'll kind of come
around and think about it your way?

THAIN: No, no. Barney's very, very smart and very talented and
understands these issues very well. I think the regulatory structure and
making sure that the financial institutions have the right regulatory
oversight, that they have the right capital structure that's really the way
to get at this issue.

BOLTON: And Rodgin, we've been talking about the Fed and its role. A
lot of people wanting to take power away, perhaps make it less independent.
You in the past have said that's the biggest mistake possible. I take it
you still have that belief?

COHEN: I still do, and you know, I find an interesting analogy to the
attempted Christmas Day bombing, where everyone is saying in the
intelligence community we need to connect the dots? In the financial
community we need to do so as well, and the Fed is better positioned than
anyone else to accomplish that dot connection.

SCHATZKER: John, part of this discussion about Glass-Steagall stems
from the fact that there are many people out there, including in
Washington, who believe that many of the largest financial institutions in
the United States are still too big to fail. Do you agree with that
nomenclature, and if not, how would you term it? How would you deal with
the problem?

THAIN: Yeah, I think too big to fail is one of the biggest issues that
we haven't really figured out what to do with yet. There's no question in
my mind that at least the top five financial institutions today are in fact
too big to fail, and trying to come up with a mechanism to deal with that.
It's obviously not a good situation where you have this too big to fail
concept and I think we really have to find a way to manage that.

SCHATZKER: Do you tax them? I mean, how do you - we've got only about
15 seconds, I apologize - but what do you do?

THAIN: Well, I don't think taxation is necessarily the right way, but
one of the things you could do is you could have a form of a fee for being
too big to fail. You could actually charge them. And the bigger they are,
the more complicated they are, the more you charge them.

BOLTON: Wow, we're going to ask Rodgin to weigh in on the other side
of this break because he has specifically said "big is not bad." We're
going to continue our roundtable discussion in just a moment.




SCHATZKER: You're watching a roundtable conversation here on the
"INSIDE TRACK" with John Thain, the former Chief Executive of Merrill Lynch
and NYSE Euronext and Rodgin Cohen, Chairman of Sullivan & Cromwell.

Well, Rodgin, I want to go right back to you because before the break
we were talking about too big to fail. John telling us that in his mind top
five institutions in this country, financial institutions, are in fact too
big to fail, and maybe we need to charge them some kind of fee for the
systemic risk they pose. You and I and Deirdre have talked about this issue
before. I want you to remind us of your feelings about too big to fail.

COHEN: Well, I do not believe there should be too big to fail, and I
would define too big to fail as protecting creditors. I believe that there
must be some possibility of creditors suffering some loss upon the
resolution of a large institution.

BOLTON: I mean, you've even pointed out in the past that Goldman
Sachs, JP Morgan Chase, are examples of where big is good.

COHEN: I absolutely think there are benefits from being big, but there
is - should certainly not be a concept that big is bad. And John's idea was
one way of dealing with the problem. There are other ways, but certainly
there should not be a too big to fail which creates a competitive advantage
for the very largest institutions.

SCHATZKER: I do want to talk very briefly about at least one of those
institutions because it was a big week for that institution last week, Bank
of America. John, it was the firm that took over Merrill Lynch. You know it
well. I want to ask you a question. Did you want the job that Brian
Moynihan got, CEO of Bank of America? I'm so curious I simply have to ask.

THAIN: Well, that's a tough thing to really ask me because, of course,
I left there almost a year ago, and I was never a candidate for that job.
And it is a tough job and, you know, I think, you know, Brian's going to
have a tough, tough job going forward.

SCHATZKER: When you say tough, what do you have in mind? I mean, if
you were sitting in his shoes, knowing Bank of America's balance sheet the
way that you do, knowing Merrill Lynch's balance sheet the way that you do,
what would your priorities be as CEO?

THAIN: Well, it's a very large institution. It has a whole broad range
of businesses. Integrating those businesses and really taking advantage of
the fundamental business strategy, which makes sense, so that the
acquisition of Merrill Lynch, the combination of Merrill's wealth
management, securities business, investment banking business, with the
range of businesses of Bank of America, there's a lot of opportunity to get
synergies there, but that's still a tough job.

BOLTON: What do you make of the way that Moynihan is managing the
bonus issue? It seems like he's paying out record bonuses but decreasing
incentive pay. Is that the right way to go? Is that the right way for Wall
Street to go?

THAIN: You know, I haven't really been able to see what exactly
they're doing. I don't think we know yet. I think that paying bonuses
that's going to be competitive so that they don't lose people is going to
be necessary.

SCHATZKER: I don't want to focus the conversation here on John
exclusively, Rodgin, but I do have one other question for him. I am
somewhat surprised to find out that you weren't a candidate for the job
given all that you knew about Merrill Lynch and all that you came to know
in a short period of time about Bank of America, but I do want to know
this. What do you think your next job is going to be?

THAIN: Well, I'm working on that and I can't really say yet, but I'm
working on what I want to do next because I definitely do want to work.

SCHATZKER: Is it safe to say that you want to return to Wall Street in
a senior capacity?

THAIN: You know, I think that's not necessarily the case and so I'm
really looking at a broader range of opportunities right now.

BOLTON: And Rodgin, we should ask you the same thing because a few
years ago you were going to retire and then I think you got sucked back in
as many people called on you for assistance, for help through the crisis.
As Erik mentioned you've probably been - sort of have the bird's eye view
and in-depth view of this crisis. What's coming up for you?

COHEN: I think more of the same, although perhaps at a less frenzied
pace because hopefully the world will be at a less frenzied pace. But I
very much enjoy what I'm doing.

BOLTON: All right.

SCHATZKER: All right. Gentlemen, we'd like to thank you, John Thain,
former CEO of Merrill Lynch. We're going to see him appear in a new job
soon by the sounds of it. Rodgin Cohen, the Chairman of Sullivan &
Cromwell. You've been watching a roundtable conversation about everything
from banks to regulation to pay to John Thain's next job, right here on the

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