Thain credibility survives despite Merrill capital U-turn

Merrill Lynch Chief Executive Officer, John Thain, poses before a news conference in Mumbai May 7, 2008.

NEW YORK (Reuters) - Merrill Lynch & Co Inc's MER.N perennially optimistic chief executive has made something of a habit of promising not to issue common shares, only to raise capital weeks later.

So far, though, investors seem to be cutting him a fair amount of slack. In fact on Tuesday after John Thain's latest about-face, Merrill's shares rose 7.9 percent.

But patience for the former Goldman Sachs and NYSE executive's flip flops may wear thin, critics said.

"This may be the last time, or you could see more writedowns. You just don't know," said Jim Huguet, co-chief executive at fund manager Great Companies.

Merrill Lynch said on Monday it was raising $8.5 billion capital after agreeing to sell toxic debt assets at a loss.

The share sale comes less than two weeks after Thain said on a conference call with investors, "Right now, we believe we are in a very comfortable spot in terms of our capital."

Thain has been making positive statements about the bank's capital for months. In an April interview with Japan's Nihon Keizai Shimbun, Thain said, "The goal is to maintain our current ratings. No more capital raising; I'm sure we have enough capital."

Weeks later, the company issued more than $2.5 billion of preferred shares.

To some analysts, these turnabouts are not fair play.

"...(W)e think management has damaged its credibility," wrote veteran banking analyst Charlie Peabody in a note to investors on Tuesday.

Peabody said the bank still has additional exposures in areas such as commercial real estate that will likely trigger more writedowns.

Thain has made other missteps, such as agreeing to raise capital at terms that would make future capital raising -- such as Tuesday's deal -- quite costly.

The company's shares have fallen 51 percent this year, compared with a 30 percent decline for the brokerage and investment bank sector as measured by the Amex Securities Broker Dealer index. .XBD

KEEPING THE FAITH

To be sure, some investors have faith in Thain. The company's shares rose $1.92 to $26.25 on Tuesday, which does not typically happen when a company issues millions of new shares at a discount to the prior day's closing price.

Aneet Deshpande, head of trading at Allegiant Asset Management, said "Thain is just an unbelievable manager. If anyone's going to come out of this smelling of roses, he will."

Winthrop Smith Jr, son of a Merrill founding partner, said the asset sale and stock offering will "allow the market to focus on the fundamentals of Merrill, which are really pretty good."

Thain is "making many of the right moves," Smith said.

So far, Thain's reputation has stayed intact in part because of his sterling resume. He worked at Goldman Sachs for more than 20 years, before the New York Stock Exchange appointed him as its chief executive.

There he helped the exchange expand into electronic trading and overseas through its acquisition of Euronext.

Thain took the reins at Merrill Lynch in December 2007, after Stan O'Neal was ousted.

To some degree, Thain is paying for O'Neal's sins, as Merrill works down billions of dollars of bad assets taken on when Thain still headed NYSE Euronext.

But Thain has made some mistakes of his own, and some investors are growing skeptical of him.

"(W)e will have to see the earnings power of the company going forward," said Ken Crawford, senior portfolio manager at Argent Capital Management, which owns Merrill Lynch shares.

(Editing by Leslie Gevirtz)