John Thain craves a challenge, and it is a trait that has served him well, at least most of the time. Over 24 years at Goldman Sachs, he leveraged his smarts to rise from corporate finance associate to president. In 2003, he took the helm of a troubled New York Stock Exchange, modernized its systems and culture, and then sold the venerable institution to its chief European rival.
Most infamously, Thain was the guy hired in late 2007 to save Merrill Lynch & Co., only to wind up selling the world's biggest brokerage to Bank of America less than a year later for $50 billion 40% less than its peak valuation, but 70% greater than the previous day's price.
A series of revelations over everything from pricey office renovations to billions in executive bonuses as Merrill reported mind-boggling losses President Obama cited the bonuses as evidence of Wall Street's greed tarnished Thain's image and eventually led to his resignation.
"I could have fixed it if I had enough time," says Thain, now chairman and CEO of CIT Group, in an interview. As he came to understand the magnitude of Merrill's problems, "I knew I was not going to have enough time to fix it. So selling to BankAmerica was the only way to protect shareholders and employees.
"That was kind of unfortunate," Thain, 59, adds. "If I knew my only choice was to sell, I never would have taken the job."
Today, Thain is back to making more positive headlines. Since taking the helm of a post-Chapter 11 CIT in 2010, he's overseen the makeover of yet another unique-but-troubled financial institution, and done so to mostly critical acclaim.
In 2014, the Livingston, N.J.-based commercial finance company earned $1.13 billion, up 67% from a year earlier, and has renewed swagger and momentum after its near-death experience.
"John has executed on everything he said he was going to accomplish when he arrived refocusing the business, selling off non-strategic assets, entering new businesses," says Sameer Gokhale, an analyst with Janney Capital Markets. "The big question is, what do the next few years look like?"
Under Thain, $48 billion-asset CIT has built out its internal risk-management capabilities, paid off debt and changed its loan mix, entering new business lines while jettisoning poor-fitting ones, such as equipment leasing in Brazil. One addition is maritime finance, an arena where long-dominant European banks have retreated.
Already a big player in aircraft and railcar leasing, CIT entered maritime finance in 2012 and has grown it into a $1 billion book of business. "There was very little competition, and it was an opportunity to lend against assets," Thain says. "That's one of the things we have expertise in."
Perhaps most significantly, CIT has added deposits lots of them. CIT was stung during the financial crisis by its historical reliance on short-term paper for funding. It converted to a bank holding company in 2008 to qualify for government support, burned through $2.3 billion in funding from the Troubled Asset Relief Program, and filed for bankruptcy protection.
Challenged to diversify CIT's funding, Thain in 2011 supersized a Utah state banking charter into an online bank. Deposits have risen sharply since, to $15.8 billion at the end of 2014, from less than $2 billion six years earlier more stable, certainly, and also cheaper than the capital markets CIT still relies on for most of its funding.
Now, Thain is morphing CIT into something many would never have thought possible only a few years ago: a somewhat traditional-looking bank, the kind with branches, checking accounts and consumer loans, to go along with more unique businesses like asset-based lending and factoring.
Last July, CIT announced plans to pay $3.4 billion for OneWest Bank, the Los Angeles-based company born of the remains of failed mortgage lender IndyMac Bank.
The deal, if it closes, would give CIT more than $70 billion in assets, making it the first company to voluntarily vault into the dreaded "SIFI" size range where additional regulatory oversight and costs kick in.
Though some bankers fret about crossing the $50 billion threshold, the prospect of CIT becoming a systematically important financial institution doesn't faze Thain. "If you're going to go over $50 billion anyways, it's better to be $70 billion than $52 billion," to capture some economies of scale, Thain says.
The deal would deploy some of CIT's capital hoard (its capital ratio is around 15%, holding down returns on equity), and double the company's deposits a potential game-changer on funding costs. It also affords the opportunity to expand into retail banking. OneWest has 73 branches, $15 billion in deposits and a sizable jumbo mortgage origination business, which Thain intends to keep.
"The retail part of OneWest both its retail branches and its mortgage operations gives us another opportunity to grow," Thain says. Within five years, CIT will be "more banklike," he adds, with a range of commercial banking services, such as cash management, and even individual wealth management.
"We're lending to a lot of companies that are owned by individuals and families," Thain says. "Eventually, you would hope you could give them a jumbo mortgage and some wealth management services."
Add it all up, says Macquarie Securities analyst Vincent Caintic, and the OneWest deal marks "a fundamental transformation" for a company that has always taken pride in doing things most banks aren't able or willing to do.
He says CIT is primarily a big-ticket leasing company right now, with a relatively small financing arm that caters to small and middle-market companies that are too risky, complicated or specialized for traditional bank lending.
After the deal, the split will be about 50-50 between loans and leases. Five years out, "it will essentially be a regional bank that houses a leasing company," Caintic predicts.
The deal isn't a certainty. Community groups have challenged the combination loudly, arguing that creating another "too big to fail" bank out of two products of "failed" institutions is bad policy.
OneWest has collected hundreds of fair-lending complaints and, critics charge, does a poor job serving low-income communities and small businesses. Allowing the merger, they insist, would provide no meaningful public benefit, despite CIT's $5 billion community-reinvestment pledge.
The volume of comment letters was large enough that the Federal Reserve held a rare public hearing on the deal in February. The event was emotionally charged, with visibly shaken OneWest borrowers, some on the verge of tears, describing difficulties with home loan modifications and reverse mortgages.
But the packed room also included a surprising amount of supporters, perhaps because Joseph Otting, OneWest's CEO, spent months seeking endorsements. He also pledged to give $5 million a year to local nonprofits.
A week after the hearing, two activist groups that oppose the merger called on federal regulators to investigate whether OneWest used donations to buy community support.
CIT's valuation it trades at about 90% of tangible book value reflects some investor skepticism that the deal will get done.
Thain, however, says he's confident the deal will close by midyear. "The hearing is part of the process; it was not unexpected," he says.
Analysts agree. "An institution that has been as vetted by regulators as CIT is going to come out on the other end very clean," says Eric Wasserstrom, an analyst with Guggenheim Securities. "That should leave them positioned well for this kind of transaction."
For Thain, the revival of CIT marks the latest in a decade-long roller-coaster ride that has garnered both accolades and criticism. He has won praise for navigating companies through formidable challenges, but also is regarded by some as emblematic of the industry's excesses.
None of that, the good or the bad, seems to have gone to his head.
While many CEOs prefer to stay out of the press, Thain is often willing to share ideas and perspectives about what's wrong with the industry. In an interview, he's affable and open, offering opinions about everything from the causes of the financial crisis (too much leverage) to the cycles of asset bubbles.
Historically, "there's always a bubble and then a crash, and then you have the period after the crash when everyone is looking to assess blame and make sure it never happens again," he says. "But markets are susceptible to bubbles. There is no making sure it never happens again."
Thain sees himself much differently than his public image might suggest. He was raised in Antioch, Ill., a small bedroom community about halfway between Chicago and Milwaukee, the son of a Main Street doctor.
A prep wrestling star wrestling, he says, requires the same "hard work, dedication and discipline" as running a company he was smart enough to get into MIT's engineering program, and then Harvard Business School, but claims to never have had any grand career ambitions.
"I had no idea. I grew up in a small town. I went to a public high school. I'd never heard of Wall Street, never heard of Goldman Sachs," Thain says of his childhood.
He arrived on Wall Street with no contacts, wealth or family connections, and climbed the Goldman ladder, exhibiting a flare for learning how the place worked and, in his words, "fixing things."
Goldman is a meritocracy, and by the 1980s he was co-managing its new mortgage-backed securities operation, which caught the eyes of superiors. From there, Thain did stints as treasurer, chief financial officer and head of European operations before becoming president in 1999.
"It's what's great about America: You can take a small-town kid who knows nothing and comes from nowhere, and he can become president of Goldman Sachs or the CEO of the New York Stock Exchange," Thain marvels. "That's what should be able to happen in America."
In 2003, Thain was recruited to run the NYSE. It was a smaller operation than Goldman, and paid much less. But being the Big Board's CEO offered the opportunity to run his own shop, and rescue an American institution that was embroiled in scandal over predecessor Dick Grasso's $140 million pay package and losing ground to faster electronic trading networks.
Over four years, Thain remade the NYSE, merging first with Archipelago, an upstart electronic trading firm, and then with Euronext N.V., the European stock exchange consortium.
Some of the 1,300 exchange members, many of whom lived off revenue from leasing their exchange seats, initially grumbled about the changes, but were mollified by the $400 million in cash and 70% stake they got in a new publicly traded NYSE Group.
"These were moves that were desperately needed; if he hadn't done them, the exchange would have fallen further behind," says William Ford, CEO of private-equity firm General Atlantic LLC and a NYSE board member during Thain's tenure.
Thain also had to engineer a cultural shift. As a member-owned firm, the NYSE was known for lax accountability and standards. Thain brought in new managers and professionalized processes. "With outside shareholders, the accountability had to increase dramatically," Ford explains.
"It was a complicated process," he adds. "John had to effectively manage his own board, regulators, broker-dealers and customers all as he was executing a stock merger with a public company and he did so very effectively."
Thain's performance impressed outsiders, and when Merrill needed a replacement for CEO Stanley O'Neal following a $7.9 billion write-off on mortgage backed securities in 2007, he got hired. At the time, it appeared to be another (albeit bigger) fix-up job; back then no one, including Thain, understood just how bad things would get.
"The vast majority of Merrill's businesses are doing great," Thain confidently proclaimed to CNBC after taking the post. "The problems are really concentrated in a relatively narrow area, which is part of fixed income."
Those problems got bigger faster than anyone imagined. Ten months and $11 billion more in losses later, Merrill stood on the precipice on that fateful September 2008 weekend when Lehman Brothers collapsed and the financial markets swooned, saved at the last minute by BofA.
In hindsight, getting someone to pay $50 billion for what was left of the world's largest retail broker might have been Thain's best play. Within months, shareholders were left with about $18 billion worth of BofA shares, but at least they got something.
For Thain, things didn't go so well. Reports that he was paid $83 million in bonuses, stock and option grants in 2007 sparked an outcry. Pushing through $4 billion in bonuses for Merrill employees prior to the BofA deal's closing, along with revelations of $1.2 million in spending on his office including $35,000 for a gold-plated chest of drawers created an image of Thain in the public's mind as another tone-deaf big shot living off the government dole.
When $15 billion in Merrill-related losses helped force BofA to seek more government support in early 2009, Thain resigned. In a departing memo to employees, he attributed most of the losses to "legacy positions" and defended the bonuses as well below the previous year's levels and "substantially less" than what BofA agreed to in the merger agreement.
Thain also said he would reimburse the company for the renovations, saying they were badly needed, but "a mistake in the light of the world we live in today."
Supporters say he was unjustly demonized. "Merrill was facing a number of challenges, and easily could have ended up like Lehman if John hadn't acted decisively," Ford says. Given the situation, "he got a phenomenal outcome for shareholders."
Thain didn't waste much time finding his next project. He needed some redemption a platform to reinvent himself as a CEO and while CIT might have looked like a step down to some, it also played to his strengths as a fixer.
"He had already proven himself as a good strategist and caretaker, but he needed to prove he is a good operator," says one person familiar with Thain. "This isn't his last gig, it's his second-to-last gig, and after Merrill he had to prove himself again."
Born in 1908 as a finance firm for less-than-investment-grade companies that couldn't get bank loans, CIT is a survivor. The company has ridden out the Great Depression, a series of mergers and divestitures (it's had a wide variety of owners, including RCA, Manufacturers Trust and Tyco International), three IPOs and, most recently, the 2009 bankruptcy filing.
It's known to many as one of the world's biggest lessors of commercial aircraft and railcars. It owns 350 commercial aircraft, 120,000 railcars and 390 locomotives, and puts them out on long-term leases to airlines, oil companies and the like.
To others, CIT is sort of a lender of last resort, the guys a small or middle-market company goes to when it's too risky, complex or specialized for a regular bank. CIT is the largest factorer in the U.S., and is big in asset-based lending. Its typical client is a B- or BB-rated borrower.
This odd blend of businesses attracts sharp people who know how to do difficult things most bankers don't. "It's a culture of 'being unique,' " Wasserstrom says, "a highly analytical risk culture of people who are highly educated in these niche-y businesses."
While many banks have auto-lending operations, for instance, few own a big fleet of passenger jets. "It's complicated to repossess an airplane," Wasserstrom says. "You've got to fly it somewhere, maintain it, keep abreast of the documentation and FAA regulations around it. That's a little different from having a couple of repo guys take back a car.
"That's been their niche complicated, riskier businesses that offer wider net interest margins" than a typical bank loan, he adds.
CIT followed the herd in the mid-00s, jumping into subprime mortgage lending because the servicing looked similar to Small Business Administration loans. According to an analysis by the Center for Public Integrity, more than half the company's $5.7 billion in subprime loans had adjustable rates, which were particularly susceptible to default.
Those loans started going bad in 2007, eating into CIT's capital. The bigger issue was the company's reliance on capital-markets funding. As the financial crisis unfolded, cash-hungry clients tapped out their credit lines, but CIT couldn't raise additional capital.
It converted to a bank holding company in December 2008 to get $2.3 billion in TARP money, filed for bankruptcy protection in November 2009, and emerged from Chapter 11 less than a month later a quick turnaround that Thain says limited the damage caused to the business. A retooled board that included seven new directors hired Thain as chairman and CEO in February 2010.
"John is a well-respected financial services executive and proven leader who is uniquely qualified to lead CIT at this critical stage," lead director John Ryan said at the time, lauding Thain's "breadth of experience, industry acumen and deep knowledge of the financial services sector."
For his part, Thain says he was attracted by a "very interesting set of businesses that did very important things," and needed help. "When you look at what I've done, they've all been jobs where someone else has broken things and I have the opportunity to fix them."
So what comes next? Some see one last big job in his future. "If someone called tomorrow and asked him to run Citigroup, I think he'd go," says one person close to him.
Politics is another potential option. Thain advised John McCain during his 2008 presidential run, and was rumored as a potential Treasury Secretary if the Arizona senator won. If a Republican lands in the White House next election, "he could have a role," says another friend. "John has always had an eye on government."
But Thain demurs. "I don't worry very much about future jobs," he says. "I'm having fun fixing this company."