Despite the initial burst of positive headlines, John Thain of Merrill Lynch, Vikram Pandit of Citigroup, Robert Willumstad of American International Group and Robert Steel of Wachovia are winning mixed praise, according to Wall Street analysts.

These were the go-to guys, the rescue squad hired to ride steerage on the ocean liner of damaged, levered securities drowning Wall Street firms, the heroes parachuting in to groom to a champion-show finish bombed-out financial results never before seen in the history of Wall Street.

But their clarion call to glory has been muted of late, their honeymoon period is pretty much over at Merrill Lynch (MER), Citigroup (C), AIG, (AIG) and Wachovia (WB). And some of these executives are getting their credibility sewaraged in the process.

The problems are not of their creation, to be sure, having taken the reins from executives who stayed too late at the party "dancing" in subprime, to quote Citi's former chief executive Charles O. Prince.

As the writedowns and losses reached epic proportions, it soon became clear that the companies' former top executives, Citi's Prince, Merrill's Stanley O'Neal, AIG's Martin Sullivan and Wachovia's G. Kennedy Thompson were smoking in bed while the house was on fire, to paraphrase one Wall Street analyst. 

Pain Circles the Globe

Worldwide, banks and investment houses have taken more than $500 bn in subprime and credit-related writedowns since January 2007, largely from the drunken daisy chain of paper Wall Street spat out in the form of asset-backed securities, now circling the globe from here to the Arctic and beyond. To date, more than $353 bn has been raised to plug balance sheet holes.

While the $500 bn plus figure is still less than the $600 bn in inflation-adjusted losses from the S&L crisis, a growing number of analysts believe that $500 bn figure could more than double when all is said and done. And some market pros believe the housing downturn is only half way over.

A Light at the End of the Tunnel?

Goldman Sachs looked at 24 house price busts declines of more than 15% since the '70s across 15 countries, and found that on average, the fall is around 30%, bottoming out after six years.

Closely watched housing indices such as the Standard & Poors/Case Shiller Index indicate the housing downturn is about at the half way point. JPMorgan Chase says it sees a "continued decline in US housing prices," with its chief executive, Jamie Dimon, characterizing the outlook as "terrible" as the bank's losses on prime loans triple in coming months. Freddie Mac (FRE) recently said the overall price decline still has as much as 20 percentage points to go.

The executives are overseeing the worst losses since the credit crisis began in the summer of 2007.Merrill is off 62% since early August of 2007, Citigroup's shares are down 58% , AIG is down 62% and Wachovia is down 61%.

The CEOs Desperately Holding On

Meanwhile, chief executives at other damaged banks and investment houses are holding onto their jobs by their fingernails.

Despite losing his role as chairman last June, Washington Mutual's (WM) Kerry Killinger is still on the stick, as shares in his bank hover around the cost of a gallon of milk or gasoline.

Morgan Stanley's (MS) John Mack is still running this blue-chip firm, though its risk management practices have been under fire (Morgan ousted last fall co-president Zoe Cruz, a 25-year veteran and head of its trading operations after a $3.7 bn subprime trading loss). 

And let's not forget the richly paid chief executives of Fannie Mae (FNM) and Freddie Mac (FRE), Daniel Mudd and Richard Syron, who have hardly seen their compensation curtailed despite helping to run into the ground the country's largest mortgage finance giants, now backstopped by the new, taxpayer-funded $300 bn housing bill, which bails out Wall Street, reckless lenders and numerous irresponsible borrowers.

Covering Up With a Multitude of Spins

For their part, Wall Street's new A-team has been making habitually self-deceiving, misguided statements about the rosy state of their companies, triggering acid reflux on the part of investors who buy their shares only to get drilled later when the companies' earnings blow flat tires after more writedowns. History repeats here, as others have made unfortunate forecasts too.

Who Said This in June 2007? 

"Troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."

Answer: Federal Reserve chairman Ben Bernanke, less than a year and half into his new job.

Two months later all holy hell broke loose.

JOHN THAIN, CHIEF EXECUTIVE, MERRILL LYNCH.Perhaps no other executive has been pilloried more for making overly optimistic statements about their companies' capital position than Thain.

Initially it was thought, give Thain a break, he's new to the job, he took over from O'Neal, an executive who mindlessly turned the Thundering Herd into the Blundering Herd, with misguided decisions like buying subprime loan purveyor First Franklin Financial from National City for $1.3 bn at the height of the bubble in September 2006 and for taking any junk loan Countrywide Financial (CFC) threw at the firm (no writedowns yet on O'Neal's $160 mn in total compensation he walked out the door with).

Over the past 12 months, Merill has reported more than $19 bn in losses, wiping out all of the earnings it earned during the housing bubble in the prior three years. It's booked an estimated $51.8 bn in writedowns and losses since the crisis began, and has raised an estimated $29.9 bn.

The Spin Doctor

But analysts grew increasingly irked by what they view as an attempt to cover up with a multitude of spins Merrill's dangerously low capital position, moves which run counter to the scissored, communion wafer crisp profile Thain has cut on Wall Street, and the reputation he won running the Big Board as a cerebral, by-the-book executive who looks more like a laser physicist.

As Thain's rosy statements kept piling up, Reuters ran a wire story spotlighting what he was saying.

The problem was, each time Thain made a positive statement after yet another writedown, specifically, that Merrill's capital sufficed, the stock market ran Merrill's shares up, investors piled in hoping for the best, only to get hammered when Merrill announced yet more writedowns and that it had to enter the equity markets once again to do more capital raises.

The worst example just occurred. Thain told analysts on July 18, after the bank wrote down $9.4 bn and sold a 20% stake in financial information services company Bloomberg LP for $4.5 bn, that: "We believe that we are in a very comfortable spot in terms of our capital." Investors bought in when the stock rose to $31.

About ten days later, Merrill announced it was writing down another $5.7 bn and needed to raise $8.5 bn in equity capital, igniting massive dilution, leaving Merrill with a whopping 1.6 bn in shares outstanding. Thain is slowly learning the art of saying something without really saying it--an art form which supports the jobs of numerous analysts tasked with slicing through the rhetoric.

Merrill's Garage Sale

Merrill's Thain has moved quickly to rid the brokerage's balance sheet of the shoddiest assets. It recently unloaded $30 bn in collateralized debt obligations for just $6.7 bn to Lone Star Capital, a Dallas vulture fund.

Although former Merrill chief Daniel Tully applauded Thain for unloading this "dynamite" off its books, on closer look, the implied, garage-sale price was really just 6 cents on the dollar to Lone Star, who got Merrill to finance 75% of the $6.7 bn deal, using as collateral the very CDOs Merrill was unloading.

Moreover, the Bloomberg sale doesn't look so hot on closer look. According to Douglas Kass, founder and president of Seabreeze Partners Management who reviewed Merrill's recently issued quarterly report, the $4.5 bn deal to sell its 20% stake in Bloomberg LP back to Bloomberg News calls for Merrill to receive only $110 million of the purchase price in cash and the rest in notes with maturities of 10 to 15 years.

A Top Analyst Weighs In

Thain "has yet to gain control of the business, because everywhere he looks he is finding additional problems to deal with," says Richard Bove, Wall Street's top bank analyst at Ladenburg Thalmann. "He chooses not to take a long view in solving the company's problems, but is slashing and burning to get to a position where he can focus on rebuilding the business model. In the process his credibility has been shot."

The Worst Isn't Over

Thain has said about $25 bn in problematic securities and assets still sit on Merrill's books. Meanwhile, as the firm cuts costs, as its lays off thousands of employees, as even Bloomberg terminals get yanked from trading desks, in a stupefying move Thain gave former Goldman Sachs top executive Thomas Montag $40 mn to run the brokerage's global sales and trading unit. 

That's five times what Thain got paid to run NYSE Euronext in 2006, and nearly equals the total $51.20 mn Stan O'Neal earned in his first four years as Merrill Lynch's chief executive, according to Forbes Magazine.

VIKRAM PANDIT, CHIEF EXECUTIVE, CITIGROUP.While Pandit is racing to trim down Citi's eye-watering $2.2 tn balance sheet, in the process he is trying to revivify Citi's blue-chip brand, having resurrected the old tagline "the Citi that never sleeps."

But that tagline has quickly morphed into "the writedowns that never sleep," as the subprime and credit mess have cost the bank an estimated $55.1 bn in writedowns and losses since the crisis blew in last year, the most of all banks and investment houses worldwide.

Junk mortgage paper, souring loans for leveraged buyouts, problematic consumer loans and credit cards continue to plague the bank. Citi has raised an estimated $49.1 bn to fill the potholes on its financials.

Investors and Analysts Skeptical

Citi plans to lay off over the next two years about 30,000 workers out of some 370,000 employees spread across more than 100 countries. Pandit is now overseeing likely the worst period in the bank's history, as things have gotten so bad that last spring, he had to endure an angry investor meeting where shareholders' bags were searched at the door, and some were relieved of their fruit for fear they would whip projectiles at bank executives. 

Analysts now question whether Pandit will force Citigroup to ditch once and for all its financial supermarket model built by predecessor Sanford Weill, as disparate computer systems and technology held together by baling wire and duct tape have bedeviled the bank amidst chaotic losses. So far Pandit says Citi will not be broken up.

A Herculean Task

Instead Pandit is now desperately trying offload about a half a billion dollars in assets off of Citi's $2.2 tn balance sheet, amid record writedowns that caused Citi to lose its number one ranking as the world's biggest bank to Bank of America (BAC).

So far it's unclear in total which assets Pandit thinks are "non-core" and should be sold to the highest bidders, but he's likely keeping his cards close to his chest to avoid arbitrage. At this point, it's unclear whether Pandit can pull off this massive sale as the credit markets largely remain in blackout mode. The concern is, too, those assets would have thrown off profits in the future. Underperformers are in the crosshairs.

Capital Raises and a Focus on Top Guns

Along with the meta-asset sale and new capital raises, Pandit and his squad slashed Citi's dividend and unveiled a plan to cut the fat marbled through the bank's operations. He's also unveiled tighter risk controls, as well as systems to centralize capital allocation and spending.

Pandit is also focusing the bank on its top rainmakers, including top gun Sallie Krawcheck, head of Citi's lucrative global wealth management business.

Pandit's Thain Moment

However, like Thain, Pandit also initially was given to overly optimistic comments about capital positions. On his first earnings call as the new CEO on January 15, 2008, Pandit said: "The first priority of risk has been to make sure that our legacy portfolio of assets in the sub-prime and mortgage areas are separated and managed to be optimized, and we have done that. We have also made sure they are well-capitalized."

About three months later, Citi wrote down $12.1 bn, $6 bn of which came from subprime. And in the following quarter it took about a $7 bn hit.  

Pandit has also been dinged for eye-glazingly wonky talk in his "Rules of the Road" guidebook he gave to top executives, a seven-part guide to managing Citi in the future. Eye-rolling cliches like "client connectivity" and "product excellence" ran rampant. 

Pandit Wins Praise

Still, he's winning praise. Pandit "seems to be taking all of the correct steps," Ladenburg Thalmann bank analyst Bove says. "He is building a management team he is comfortable with," adding "he is decentralizing the operating structure to get more accountability at local levels" and "is writing off problems as he sees them develop."

Bove notes Pandit "is attempting to solve the company's problems business by business. This is what made [JPMorgan Chase's] Jamie Dimon a success."

ROBERT WILLUMSTAD, CHIEF EXECUTIVE, AIG.Willumstad, a 40-year bank veteran who was chairman of AIG, got the CEO job June 15thafter AIG ousted former top exec Martin Sullivan amid record losses, historic writedowns, regulatory probes and stock lows not seen in decades at the world's biggest insurer, which operates in 130 countries.

Despite promises of a major overhaul in the works, Wall Street was initially skeptical of Willumstad's appointment, sending AIG's shares down a half a point the day Willumstad got the top job. Prior to his new CEO role, in January, 2006, Willumstad left his job as chief operating officer of Citigroup to take over the chairman role at AIG from former Nasdaq head Frank Zarb.

AIG's Hard Top Spin  

AIG's former top exec, Sullivan, was also prone to rosy comments, telling investors in early December that the insurer's credit default swaps written on complicated mortgage-backed debt securities, or collateralized debt obligations, were fine, "because this business is carefully underwritten...we believe the probability that it will sustain an economic loss is close to zero."

Within months, AIG disclosed $13 bn in losses driven by problematic CDSs, among other things. To date it has reported $25 bn in total write-downs and nearly $19 bn in three consecutive quarterly losses that have nearly wiped out its profit for the past two years.

Shares plunged 19% in intraday trading after the disclosure of its most recent $5.4 bn in losses, the largest one day percentage in 39 years. Shares eventually closed down 18%, the fifth-largest percentage drop in its history.

Spooking the Street was AIG's disclosure that its core businesses, property-casualty policies, also posted deep operating losses.

Capital Raises, and a Plan

Willumstad says he will unveil a plan to dramatically overhaul AIG's financial products division at an investor meeting on Sept. 25. It's expected Willumstad will try to unload toxic mortgage-backed assets and divisions where bad loans have sucked dry profits, such as mortgage insurer United Guaranty Corp., which posted a $440 mn operating loss in the second quarter, analysts said.

Analysts are watching closely to see how quickly Willumstad moves to dump nettlesome securities, or whether he hews to the position Sullivan took, that these are paper losses and not cash losses generated by faulty accounting rules that force companies to mark to market securities, when the markets are in blackout mode and no one wants them, even though these securities may be backed by decent assets.

Willumstad Crooks the Trumpets, Too

AIG raised $20.3 bn in May via a debt and equity offering to restore capital and against future writedowns. The capital raise led Willumstad to tell investors that he was "comfortable" with how much capital AIG has, despite the fact it ended the second quarter with less capital than the first. Citigroup analyst Joshua Shanker noted in May that AIG may have to raise $10 bn more.

Now Standard & Poor's threatens to downgrade AIG if earnings "do not stabilize by the third quarter," a downgrade that would force AIG to pony up $10 bn more to back the swaps (AIG says it has $16.5 bn in collateral against the swaps).

The End Not Here Yet for AIG

For now, the company does not see the light at the end of the tunnel just yet. At the first quarter's end, it said final losses could come in between $1.2 bn and $2.4 bn.

The company recently more than tripled its "worst-case" estimate for credit swap losses to as much as $8.5 bn. That is still below a $9 bn to $11 bn estimate made recently by an outside firm hired by AIG. Morgan Stanley estimates the losses at $13 bn. Asset sales may be in the offing.

The Probes Continue

Also, the Justice Department and the SEC are reportedly investigating whether the world's biggest insurer overstated the value of credit default swaps, derivative contracts linked to subprime mortgages. Prosecutors from the Department of Justice and the U.S. attorney's office in Brooklyn, New York have reportedly asked for information the SEC is gathering, which reportedly could signal a criminal investigation.

An AIG spokesman has said the company would co-operate in regulatory and governmental reviews on all matters.

ROBERT STEEL, CHIEF EXECUTIVE, WACHOVIA. A Wall Street and Washington veteran, Steel, 56, took over from G. Kennedy Thompson, the former head of the Charlotte, N.C.-based Wachovia Corp., after Thompson was ousted by Wachovia's board of directors in early June.

At the time a deluge of problems threatened to swamp the country's number four bank, based on assets. Since the crisis began, Wachovia has been hit with an estimated $22.5 bn in writedowns and losses, and has raised $11 bn.

Regulatory probes, criticism over poor internal controls, directionless strategy and this whopper. Much like Merrill's move to buy First Franklin, Wachovia has since been heavily criticized for its decision to buy Golden West, a bank that made its living giving out subprime loans, for $24.2 bn at the top of the market in October 2006.

Wachovia may have to write off much of the $14 bn in goodwill from the purchase of the California mortgage lender.

By the time Thompson left, Wachovia's shares plunged 50% in price. As mortgage defaults mount, Wachovia also said it now plans to lay off 6,950 people, up from 6,350 last month.

A Man of Steel

Steel joined Wachovia from the Treasury Department, where as under secretary for domestic finance he worked on legislation to bolster the agency regulating mortgage finance giants Fannie Mae and Freddie Mac.

Steel was also involved in JPMorgan Chase's spring bailout of Bear Stearns, a shotgun wedding ushered along by the Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson (JP's Dimon sits on the board of the New York Federal Reserve Bank). Prior to that, the North Carolina native worked for 28 years at Goldman Sachs Group, retiring as vice chairman in February 2004 (Treasury Secretary Paulson was chief executive back then).

A Fight for Survival

Now Steel is fighting for the survival of the bank, which has $809 bn in assets, in the face of record losses and writedowns.

Wachovia is now struggling to resurface from under the weight of an eroding $122 bn portfolio of option adjustable-rate mortgages, and another $206 bn in commercial loans, up 25% from a year ago. Wachovia recently said it will stop offering option ARMs, which let borrowers skip some payments, a blue plate special sold by Golden West.

Steel at the Wheel

Steel has reportedly bought one million shares in Wachovia worth $16 mn, and in a bout of optimism has said that Wachovia has no plans to either raise more capital or issue more common shares.

Steel is also said to be considering a "good bank-bad bank" structure for Wachovia, a move used during the S&L crisis of the late ‘80s and early ‘90s to fix damaged thrifts, whereby separate units are set up to absorb bad loans and ring fence troubled assets away from the good assets that are working.

Bank analyst Richard Bove is skeptical. Steel "has never run a large institution," Bove says. "He does not know commercial banking and he has no background in risk management. Thus, it is intellect and learning on the job that we are looking at here."

Regulatory Probes Mount

Wachovia has an unusually large number of regulatory probes.

It recently agreed to pay $144 mn to settle charges of turning a blind eye when telemarketers used the bank's accounts to steal from customers, many of them senior citizens. Wachovia did not admit or deny wrongdoing.

Telemarketers reportedly had obtained account information from consumers through a variety of ruses, and then used the information to write themselves fraudulent checks, which they deposited at Wachovia.

Wachovia is also reportedly under scrutiny for money laundering by Mexican and Colombian money transfer companies moving proceeds of US drug sales to Latin America. Wachovia had reportedly cultivated ties with the money-transfer outfits, but says it cut its ties to them when the probe began last December.

And Wachovia has been caught up in the municipal securities bid-rigging investigation involving auction rate securities sold as liquid cash equivalents, when they turned out to be highly illiquid instruments after the $330 bn market for them collapsed in February 2008, stranding investors.

"Progress was made" with Wachovia towards an agreement to address the $9.5 bn of ARS held by Wachovia customers, says the Missouri secretary of state, Missouri being one of the government bodies looking into Wachovia.

Wachovia recently made a regulatory filing detailing a $500 mn pretax increase to legal reserves. It also said that will increase its second-quarter net loss, originally disclosed on July 22, to $9.11 bn from $8.86 bn.