Dec. 19–NEW YORK–The New York Stock Exchange yesterday named John Thain, a boyish-looking Goldman Sachs Group Inc. president known for his technology expertise, as its new chief executive officer.
Thain, 48, said his primary goal was to restore investor confidence in the 211-year-old exchange, whose image has been tarnished by a pay scandal involving its previous head, Richard Grasso, who resigned in September, and by ongoing questions about whether its traders put their interests ahead of the general public’s.
“I’m humbled by the prospect of leading an institution that traces its origins to the first days of our nation and that has grown to symbolize the heart of American capitalism,” Thain said at a news conference at the exchange.
Thain will leave his job at Goldman — the prestigious investment-banking firm where is was considered a possible successor to chairman and CEO Henry M. Paulson Jr. — to become NYSE chief Jan. 15. He replaces John Reed, a retired chairman of Citigroup Inc. who had stepped in to replace Grasso temporarily. Reed will remain chairman of NYSE until a replacement is found.
Thain takes the reins at a crucial point for the exchange. Coming after a wave of scandals in the corporate world, the discovery that Grasso had received $140 million in retirement pay only served to convince many investors that Wall Street was a risky place for their money.
In addition, an increasingly loud chorus of big investors has complained that trading on the New York Stock Exchange is too expensive. Unlike its primary competitor, the NASDAQ, which is an electronic market, the New York exchange relies on an “open outcry” auction system, with a person involved in every trade.
On Tuesday, the California Public Employees’ Retirement System Critics, a giant pension fund, sued the exchange and several firms that trade there, claiming that they had shortchanged investors. The CalPERS suit charges that NYSE traders, who have access to detailed buy and sell order information, often put their own trades ahead of those of outside customers.
The Securities and Exchange Commission is investigating similar charges. Goldman owns one of the firms being investigated, Spear Leeds & Kellogg.
In addition, several large investment firms, including Fidelity Investments and American International Group, have said that the NYSE’s specialist system, in which a person is assigned to individual stocks and given the responsibility of maintaining orderly trading in the stock, hurts large traders like itself — and, ultimately, the thousands of individuals they represents.
“Investors pay for it,” said Mercer Bullard, a former SEC lawyer who now runs Fund Democracy, which advocates for shareholder rights. “It’s their money that’s being spent.”
At a conference in November, Thain said he thought the NYSE should execute more trades electronically. That led some market experts to predict that his appointment would mean less business for the NYSE specialists, perhaps even the end of the exchange floor that serves as the television backdrop for nightly business reports.
“Any business where your largest clients hate you but have to deal with you, I think it’s a matter of time before it goes away,” said Jim Cramer, a former hedge fund manager and Philadelphia native who hosts the CNBC show “Kudlow & Cramer.”
Reed and Thain, however, both said they expected the specialist system to remain in intact.
“That auction market that exists downstairs is a heck of a lot more effective than I would have thought before I got here,” Reed said today. “[Reporters] position this as computers versus specialists. That is superficial at best. Anybody who has a complicated transaction, it ends up being totally manually massaged.”
Said Thain: “I think the specialists will continue to be viable and economically effective.”
Reacting to Thain’s appointment, some people wondered whether he was too much of a Wall Street insider.
“My first impression is that … it’s the goat minding the cabbage patch,” John Bogle, founder of the Vanguard Group of mutual funds, told Reuters. “I don’t think you can be more of a consummate insider than Goldman Sachs.”
Reed said the NYSE board believed it had to hire someone from the inside who knows the markets intimately. He said the board would seek someone from outside Wall Street for the chairmanship post
Thain is not likely to stir any controversies about his pay. With an electrical engineering degree from MIT and an MBA from Harvard, Thain will earn $4 million in his new post. That is significantly less than Grasso and represents a pay cut from Goldman, where he earned $6.4 million, not including stock-option grants in 2002 and $10.5 million in 2001.
Market-watchers painted Thain and Reed as managerial twins. Both went to MIT and sit on its board.
“He’s a person like John Reed,” said Richard Sylla, professor of financial history and economics at New York University. “They both have a reputation in what might be called the technology of modern financial systems, so it’s possible that with that kind of leadership, the stock exchange may be able to change the perception that it’s method of doing things is pretty old-fashioned.”
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