MIT Alumnus Thain Chosen to Lead Merrill Lynch

John A. Thain ’77 won plaudits as Wall Street’s Mr. Fix-It by revitalizing the embattled New York Stock Exchange. Now, he faces what could be a more formidable challenge: turning around Merrill Lynch, the once-proud Wall Street firm battered by losses from the mortgage debacle.

Wednesday, Mr. Thain, who had risen to co-president of Goldman Sachs but left for the stock exchange, was named chairman and chief executive of Merrill, where he will compete against his former colleagues.

Repairing the reputation of Merrill, one of the biggest casualties of the recent turmoil in the financial markets, will test the financial and political mettle of Mr. Thain, 52. Merrill’s former chief executive, E. Stanley O’Neal, was forced to resign two weeks ago after announcing an $8.4 billion write-down and approaching a rival bank to discuss a merger.

Although Mr. Thain’s name was on a short list of candidates from the start, his hiring still took Wall Street by surprise. Many top-level executives had expected that the job would be offered to Laurence D. Fink, the founder of BlackRock, a large investment firm partly owned by Merrill.

But according to people briefed on Merrill’s decision, Mr. Thain was selected, not just because of his success at the exchange but also because of his understanding of risk management systems at Goldman, which has largely avoided the problems plaguing its rivals.

Merrill directors personally wooed Mr. Thain at his home in Rye, N.Y. At 5 p.m. Sunday, Ann N. Reese, a Merrill director who lives nearby, stopped by his house for a cup of English tea.

For two hours, she and Alberto Cribiore, the firm’s interim nonexecutive chairman, encouraged Mr. Thain to join the firm. Mr. Thain had also met with members of a search committee seeking to fill the top job at Citigroup, whose chief executive, Charles O. Prince III, resigned in the wake of multibillion-dollar write-downs related to subprime mortgages.

Fixing Merrill’s problems will take some time, Mr. Thain said Wednesday, because the issues troubling the overall mortgage market are likely to continue for another 6 to 12 months. “We have not seen the bottom,” he said.

Mr. Thain went to the NYSE in 2004 and is widely credited with modernizing and expanding the 215-year-old exchange. He stepped into turmoil there, including a scandal over the $187.5 million pay package of Richard A. Grasso, the former chairman, and a federal investigation into trading practices.

Slightly more than a year after he arrived, he executed a deal to merge with Archipelago, an all-electronic platform, converting the nonprofit institution into a public one. He then took on the Deutsche Börse to win Euronext, a pan-European exchange, which ultimately merged with the New York Exchange.

“The exchange was in flux and he resuscitated the place with the acquisition of Archipelago and the merger with Euronext,” said John R. Jakobson, a former member and a current shareholder. “It was on life support then, and it’s in first-rate condition today.”

The exchange went public in March 2006 at $67 a share; it closed Wednesday at $86.74.

While Mr. Thain boasts an impressive résumé, he is known more as an analytical technocrat. While he was not popular on the exchange’s floor, analysts say he was respected. For example, the Archipelago deal was criticized when announced, but he ultimately got traders to vote for it.

“He’s articulate and can consensus-build,” Richard H. Repetto, an analyst at Sandler O’Neill, said. “He had to deal with members as they saw their jobs become extinct.”

Mr. Thain started his career at Goldman as an investment banker and went on to work in mortgage securities, ultimately running the desk in the late 1980s.

In 1994 he was promoted to chief financial officer and head of operations, technology and finance. In 2003, he became co-president and co-chief operating officer with John Thornton. He was considered a candidate to run Goldman Sachs after Henry M. Paulson Jr., now the Treasury secretary.

But Mr. Thornton left Goldman and Lloyd C. Blankfein, then the head of the firm’s powerful fixed- income group, was on the ascent. Mr. Thain, when he was contacted by John S. Reed, opted for the chance to run the exchange. (Mr. Blankfein now runs Goldman.)

Mr. Thain now faces a formidable task at Merrill. Under Mr. O’Neal, the bank aggressively entered into new and riskier businesses, including underwriting collateralized debt obligations, originating subprime loans and expanding its proprietary trading operations.

Mr. O’Neal also reached out to G. Kennedy Thompson, the chief executive of Wachovia to explore a merger, an approach that might have been acceptable if the board had not been reeling from the magnitude of the loss. After the merger approach became known, Mr. O’Neal was forced to resign.

Although Merrill did not disclose what Mr. Thain would be paid, it is expected to be more than what Mr. O’Neal received. Mr. O’Neal earned $70 million in the last five years, and took home an additional $161.5 million in stock he had deferred and in retirement benefits.

Mr. Thain took a pay cut to go to the exchange in early 2004: he made more than $20 million at Goldman in 2003 but agreed to a starting salary and bonus of $4 million at the exchange. He will leave with $820,000 of deferred compensation, $3.6 million in restricted stock, and options on top of the $14.9 million he made at the exchange, according to Equilar and James F. Reda & Associates.

Some challenges that Mr. Thain will face will seem familiar: rebuilding risk management and continuing to build the investment bank. But managing a huge brokerage business — Merrill’s is the largest in the United States — will be new. And he will have to learn that portion of the business at a time when the subprime mortgage crisis continues to cause Wall Street to reel.

When asked if he was nervous about joining a company whose board oversaw the mess it is in, he said: “It was a very important question for me to understand, and I got comfortable with their answer.”

Perhaps most important, he will have to focus on Merrill’s culture, one that has been through iterations of “Mother Merrill” — the happy, back-slapping but bloated days of the past and the highly political, aggressive reign of Mr. O’Neal.

The decision to pick Mr. Thain came as a surprise to many. While the search committee, led by Mr. Cribiore, made it clear to Mr. Fink that he was a top, if not leading candidate, the board, from the outset saw Mr. Thain as the best choice, people briefed on the board’s deliberations said. While that decision had much to do with Mr. Thain’s mix of risk experience at Goldman and his time at the exchange, it was also influenced by a sense that the board wanted to keep Mr. Fink at BlackRock.

Merrill has a 49 percent stake in the firm, and BlackRock under Mr. Fink has presided over a sharp revival in the performance of Merrill’s equity funds, which BlackRock now manages.

Mr. Fink has an outgoing, garrulous personality and a network of personal relationships that reaches into virtually every corner of Wall Street. And as the board’s courtship of him continued, he talked freely about the pros of leading Merrill compared with the cons of leaving BlackRock. At a BlackRock board meeting last week, Mr. Fink told directors that the Merrill search committee had expressed an interest in him and while he was intrigued about the possibility, the thought of leaving BlackRock, was giving him pause.

But, while the logic of his coming to Merrill might have looked good on paper, no board likes to be pushed into picking a chief executive. And the public presumption that Mr. Fink would simply be offered the job rubbed directors the wrong way, according to a person briefed on the board’s deliberations.

“None of the media speculation weighed into the board’s decision-making,” a Merrill spokesman, Jason Wright, said.

Despite a week of intense discussions, Mr. Fink had little sense that the board’s top choice was Mr. Thain, according to people briefed on the talks. And when the news broke early Wednesday afternoon that Mr. Thain had taken the job, Mr. Fink was as surprised as anyone, having not received a call ahead of time, people who were briefed on the talks said.

Mr. Fink declined to comment.

Merrill directors voted unanimously Wednesday morning to offer Mr. Thain the job. While he does not start until Dec. 3, he came over to meet members of the operating committee and even stopped by an event on the 33rd floor with private clients last night.

Mr. Thain will now compete against Goldman Sachs, his alma mater, and a firm he praises. “I love Goldman Sachs and I love the people, but I think Merrill will be a great competitor.”