John Thain's turnaround challenge

NEW YORK (Fortune) -- Not so long ago, John Thain's legacy was that of the Merrill Lynch CEO who redecorated his office for $1.2 million before selling the dying investment firm to Bank of America in a controversial deal that is now under criminal investigation.

But now that Thain has been tapped to steer CIT Group (CIT, Fortune 500) out of its post-bankruptcy wilderness, he could be remembered as much more than the man who bought a $35,000 office toilet. He could become one of finance's greatest turnaround artists.

That is because Thain has stepped into the breach before and won big for shareholders, first at the New York Stock Exchange (NYX, Fortune 500), then at Merrill. In fact, his success at the NYSE was among the factors that led to his choice.

"Among the accomplishments that most impressed the Board was his role at the NYSE, where he modernized the exchange and better positioned it to compete in the global marketplace," CIT spokesman Curt Ritter tells Fortune.

And the markets agree. Hope for Thain's ability to help the small-business lender find its way sent shares up 2.5% Monday, thanks to the weekend announcement that he is taking over as CIT's chairman and CEO effective immediately.

Taking the reins at NYSE and Merrill

This is not the first time John Thain has stepped into a troubled company to create value for shareholders.

He became CEO of the New York Stock Exchange in 2003 at one of the lowest points in the 207-year-old institution's history. Not only was the board in a bitter dispute with its ex-chief Richard Grasso over $140 million in compensation, but the NYSE faced obsolescence in the face of electronic trading.

Thain forced the NYSE to adopt technology that got rid of the need for floor traders and automated trades. He then merged the NYSE with the electronic exchange Euronext in 2007, pushing an arcane and stale club to become an international powerhouse. The NYSE-Euronext is the world's largest stock exchange by the market cap of its companies, and it was the very first transatlantic stock exchange.

When the NYSE held its initial public offering in March 2006, the shares were worth about $64. When the deal for Euronext was completed in April 2007, they were worth $97 for a jump of almost 52%.

Thain posted a big win for Merrill Lynch shareholders as well, even though his name has been tarnished by his ouster from the merged company. He took the reins at the end of 2007, and in the nine months that he led the bank, he realized that Merrill would not survive on its own as the credit markets began to freeze.

Not only did Thain sell Merrill to Bank of America (BAC, Fortune 500), he did so as the credit crisis reached its frenzied peak over the same weekend that Lehman Brothers filed for bankruptcy and the government was forced to orchestrate a rescue of the insurer AIG (AIG, Fortune 500).

Amid that chaos, he sold Merrill for $50 billion, or $29 a share. That's a 70% premium over the company's then market price, and he did it by steering BofA and its lifesaving pocketbook away from Lehman.

Thain has also managed to duck many of the critics and regulators who are crying foul over Bank of America's purchase of Merrill. Those barbs have been reserved for his rival, former BofA CEO Ken Lewis, who was recently charged with fraud by New York Attorney General Andrew Cuomo for his role in the deal.

The CIT challenge

Now that he is the chairman and CEO of CIT, one of the nation's most important lenders to small- and mid-size businesses, the company's funding problems will be among his top priorities. Like many other financial service providers, CIT grew to rely upon the unsecured, short-term debt markets for financing, and as the financial crisis unrolled it could no longer borrow money.

Thain needs to take care of CIT's loan book, which has been battered by losses after expanding into high risk lending areas like subprime and student loans under ex-CEO Jeffrey Peek (another Merrill alum).

He also needs to rebuild his management team. CIT's president and chief operating officer Alexander Mason will leave on February 26, and chief financial officer Joseph Leone is set to retire in April. The company's chief risk officer stepped down last year.

CIT is subject to pay restrictions because of its participation in the government's Troubled Asset Relief program, so recruiting top talent could be a challenge. But the clean slate also means he can stock the C-suite with a team that is completely loyal and supportive of whatever change he brings to the company.

CIT is throwing its weight behind Thain and his reputation for turning companies around. "Mr. Thain is a proven leader and highly respected financial executive, and the Board has great confidence in his ability to lead CIT at this critical time," says Ritter.

Bank of America and its troubles could soon become a distant memory for him. He is now at the top of a $12.5 billion company less than 13 months after being ousted by Ken Lewis. If the markets' initial reception of his new posting is any indication of things to come, John Thain's rehabilitation could well be underway.