Thain Bounces Back as CIT Deal Masks Merrill Memories

By Elizabeth Dexheimer and Max Abelson  

Photographer: Scott Eells/Bloomberg

John Thain, chief executive officer of CIT Group Inc.

Six years after John Thain became a central figure in the financial crisis with his shotgun sale of Merrill Lynch & Co., he’s helping bring back bank deals.
Thain, 59, was appointed to run CIT Group Inc. (C) in 2010 as it emerged from bankruptcy. The job was a new start after the former Merrill Lynch chief executive officer sold the Wall Street bank for a premium at the worst of the crisis while being pilloried for $27.6 billion in losses and an office remodeling that included a $35,000 commode. CIT’s $3.4 billion deal yesterday to buy OneWest Bank is among the industry’s biggest since that turmoil, signaling rebounds for the lender and Thain’s career.

OneWest, backed by billionaires John Paulson and George Soros and overseen by Chairman Steve Mnuchin, a senior Goldman Sachs Group Inc. executive with Thain early last decade, has also revived. OneWest was known as IndyMac Bancorp in 2008 when it collapsed in the second-largest U.S. commercial bank failure.
“We believe that the primary reason why John Thain took the CEO job at CIT Group was as a means of reinstating his reputation,” said Mark Palmer, an analyst at BTIG LLC. “He has demonstrated his ability to turn around a company.”
By buying OneWest, CIT can access more retail deposits, cheaper funding that can help boost profitability. Thain’s firm rose as much as 14 percent yesterday, the most since it exited bankruptcy. Since Thain joined the firm, the lender has exited businesses including student loans, halted losses and more than doubled deposits.

Offensive Strategy

“All of the issues that existed when I joined the company as it came out of bankruptcy have basically been corrected,” Thain said in a phone interview. “This is really the first step in what I would call the offensive part of the strategy.”
CIT’s relationship with regulators has improved since the firm’s near-collapse. The company reinstated a dividend and authorized buybacks after the Federal Reserve withdrew its oversight last year. While the OneWest deal satisfies calls for CIT to boost deposits, regulators still need to approve a takeover that would create a bank with $67 billion in assets, enough to be deemed a systemically important institution subject to more scrutiny.
“It’s an opportunity for regulators to send a message,” said David Hilder, an analyst at Drexel Hamilton LLC. “If they choose to slow it down or put roadblocks in the way, that will be another strong message that the regulators don’t want consolidation.”
Since taxpayers rescued the financial system by bailing out banks that were considered too big to fail, combinations among the largest lenders have stalled. Regulators have held up mergers including M&T Bank Corp.’s proposed $3.7 billion acquisition of Hudson City Bancorp Inc., announced in 2012.

‘Repair Guy’

Thain has “proved himself to be a balance-sheet repair guy,” said David Ellison, a money manager whose Hennessy Large Cap Financial Fund invests in banks, including CIT. “This shows that these two companies, given enough time and given an environment that is favorable, will recover.”
Hedge funds run by Paulson, 58, made almost $1 billion on its investment in OneWest, according to a memo sent to clients. The sale values the fund’s stake at $788 million, the person said, and Paulson also received $551 million in dividends. The fund paid $400 million for the stake in 2009.
Thain, the son of a doctor, grew up in Antioch, a rural village on Illinois’s northern edge. He didn’t visit the East Coast until he arrived at the Massachusetts Institute of Technology in Cambridge to study electrical engineering. He went directly to Harvard Business School and then New York-based Goldman Sachs, where he worked in investment banking and traded mortgage bonds.

Merrill Sale

In 1993, he moved into the administrative side of the company -- known as operations, technology and finance -- and later became chief financial officer. He eventually ascended to president and chief operating officer under then-CEO Henry Paulson.
Thain became CEO of the New York Stock Exchange, and in 2007 took the helm of Merrill Lynch as its losses began piling up. Less than a year later, on the same September 2008 weekend that Lehman Brothers Holdings Inc. collapsed, he persuaded Bank of America Corp. to pay $29 a share for the firm, a 70 percent premium. Within months, Merrill Lynch’s losses accelerated, Thain was fired and he faced a public furor over the $1.2 million office remodeling and $3.6 billion of bonuses.
“We decorated it in the style that Merrill Lynch offices were, which was very, very nice,” he said at the University of Pennsylvania’s Wharton School in 2009. “If I had that to do over again, I’d furnish it in Ikea.”