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Merrill's Thain Pleads for Ongoing Fed Access

Merrill Lynch Chief Executive John Thain Tuesday said he would like to see broker-dealer access to the Federal Reserve discount window continue longer term, though any increase of regulation must be appropriate for securities firms.

"I think it should stay available to the banks and investment banks -- the primary dealers. It's important that it does stay available," Thain said at a Wall Street Journal dealmakers conference in New York.

Thain said his company has not borrowed money from the discount window. The central bank historically lends money to commercial banks at extremely low rates to fund operations but expanded access to large broker-dealers as Bear Stearns collapsed.

Currently the special program is scheduled to expire in September. Thain said he was open to new rules in exchange for that access, such as capping leverage ratios, but added that they can't be the same rules used for big commercial banks.

"You can't take rules created for one type of financial institution and apply them to another. There have to be rules appropriate for the type of business," he said.

A long time critic of current regulation of U.S. markets, Thain said there was too much duplication among government agencies. Investment banks, he said, must answer to the Fed, the Securities and Exchange Commission and others.

Less Leverage

Thain, who kicked off a two day session about mergers and finance, observed that Merrill suffered $25 billion of losses in recent quarters and most of those losses were generated by a thin slice of a sprawling 60,000-person firm.

Thain, who formerly ran the New York Stock Exchange and was a president at Goldman Sachs, has been trying since November to turn things around at Merrill.

"Everyone is shrinking their balance sheet. There was too much leverage in the system, too much credit, for too long. It was not just the investment banks: the hedge funds were being levered. The private equity firms can't get leverage either," Thain said.

The renewed focus on capital and leverage ratios won't necessarily solve every problem. The collateralized debt obligations (CDOs) that generated heavy losses for firms were not even on the balance sheet, he said.

Looking down the road, Thain said investment banks "absolutely" can generate "mid-teen" percentage returns on equity. That's highly profitable, he said, though not at the same levels seen during Wall Street's recent boom years.

Thain said in the quarter ended in March Merrill sold down $5 billion of leveraged loans and then made $1 billion more in new loans. "Deals can be done, they just have to be less expensive and less levered," said Thain.

Thain also said he believes the commercial mortgage markets are "fine." Many analysts have predicted this sector would generate new rounds of losses for lenders.

One solution to better risk management is to revamp payment schemes, so that traders are paid well only if the whole firm does well and their division does well, and not just themselves, Thain said.

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