Meeting John Thain in person is a bewildering experience for anyone who has had much contact with C.E.O.'s or Wall Street moguls. His manner is that of a distant relative at a family reunion, friendly in an unforced way. He speaks slowly in a high-pitched Midwestern accent. He is anything but slick—"a quieter personality," notes Robert Rubin, the former Treasury secretary who nurtured the young Thain in his early years at Goldman Sachs.

And yet here is John Alexander Thain, suburban dad and former high-school wrestler, installed at the top of Merrill Lynch during one of the most tumultuous moments in finance. It is white-knuckle time at Merrill. In addition to its subprime woes, which have infected all of Wall Street, this old-school, tradition-conscious firm is suffering from a kind of corporate post-traumatic stress disorder following the divisive, nearly disastrous tenure of Thain's predecessor, Stan O'Neal. Not since the Salomon Brothers scandal, in 1991, when Warren Buffett arrived on a white charger to confront a Treasury-bond-trading debacle, has a new C.E.O. faced such a variegated mess. Even compared with other questionable deals in the current crisis, the subprime-mortgage ventures at Merrill were freakishly ill-advised. Some $24 billion has had to be written off of the company's balance sheet, making Merrill one of the names, along with Lehman Brothers and Morgan Stanley, on the whisper list of Wall Street firms that could join Bear Stearns in an epic meltdown. Thain has the unenviable task of preventing that from happening—and of preserving Merrill's independence amid a plunge in the company's stock price, a flurry of subprime-related lawsuits, and any number of state and federal investigations. (View slideshow of some of John Thain's rivals and former colleagues.)

As one of the earliest traders in mortgage-backed securities—with a résumé that includes engineering the rescue of the mega-hedge fund Long-Term Capital Management in 1998, the collapse of which seems eerily familiar today—Thain is no stranger to either the intricacies of mortgage bonds or the delicate job of extricating firms from self-created trading fiascoes. He overhauled the decrepit, conflict-plagued New York Stock Exchange after stepping in to replace longtime C.E.O. Dick Grasso in 2003. Thain is, in short, less a technocrat than a steely corporate warrior, having emerged victorious from both a Goldman power struggle and the poisonous infighting of the N.Y.S.E. He brings to the investment bank—and to America's rattled financial markets—a steadiness to match his Buzz Lightyear looks. This may be precisely what banks like Merrill Lynch need just now: the nonflashy executive who, like Goldman's Lloyd Blankfein, is successful precisely because he is so nondescript.

But Merrill's troubles go far beyond its recent subprime problems, and the solutions are less obvious than those Thain applied at the exchange. The firm is fixable—if. The ifs pile up on one another. If Thain can salvage Merrill's reputation amid the multiple investigations, including a criminal probe by the United States Attorney for the Southern District of New York. If the credit crunch doesn't worsen, turning the firm's billions of dollars in derivatives exposure into a time bomb. If Thain can nurture Merrill's cash cows—its brokers and investment bankers—in a murderous economy. And last, and most delicate, if he can foster a climate of trust and respect in a company with more than its share of sensitive egos.

Also on Portfolio.com: Citi at a Crossroads It's Vikram Pandit's bank now. Can he get past an ugly quarter and lead a turnaround? Merrill Takes a Hit After another big subprime hit, Thain works on an overhaul.

It is late in the morning of January 17, just 47 days into Thain's tenure as Merrill's chief executive officer, and he is facing an auditorium full of restive employees at a town-hall meeting in New York. A few hours earlier, the firm had announced a record loss of $9.8 billion, almost all of which resulted from its expedition into subprime mortgages and the metastasizing securities and derivatives based on them.

Thain knows that his first job is not to appease angry shareholders—an almost impossible task, at least for now—but to keep Merrill Lynch from melting down. It is a sign of the times that this is the new benchmark of success. In just six weeks, Thain has raised $12.8 billion in capital, begun to assemble a new management team, and applied a backhoe to the muck on the balance sheet. Now comes the hard part: restoring the company's shattered morale. That's why Thain opts to meet so quickly with hundreds of Merrill employees—clerks, brokers, analysts, and techies—in person, with thousands more linked worldwide by teleconference and workstation video hookups.

Something unexpected happens. Thain, belying a reputation for being stiff and robotic, turns on the charm with dry humor and a relaxed demeanor. A rambling question—a complaint, really—comes in from a broker in the Minneapolis office. Thain hands the call off to a subordinate, drawing laughter without embarrassing anyone. "He's a much better people manager than people would expect him to be," says William Ford, a former colleague and NYSE Euronext board member, who is C.E.O. of General Atlantic, a private equity firm.

Merrill's brokers (16,740 according to its most recent quarterly report) are the heart and soul of the 94-year-old firm. Until the latest mess, they were responsible for pretty much all that was bad or good about the company, at least in the public eye. After O'Neal took charge of the brokers in 2000, two years before he became C.E.O., 6,600 of them were fired, and the years that followed brought unprecedented carnage: 24,000 jobs cut companywide, 300 field offices shuttered, analyst and banker positions slashed. The cuts were not sadistic—they were amply justified by a stuttering market and resulting investor jitters—but they seemed that way.

Since then, the brokers have been producing, mad as they are. During the last three months of 2007, they pulled in an impressive $30 billion in new assets, from retail clients alone, in a tough market. They despised O'Neal, and the feeling was mutual. Now they watch closely as Thain takes a question from the crowd.

One man, smiling sardonically, asks if Thain plans to revisit the acquisitions undertaken by O'Neal. Thain begins his response in conventional C.E.O.-speak, praising the year-old purchase of a private bank called First Republic. But nobody cares about that, and he knows it. What's on everyone's mind is the subprime monstrosity First Franklin, which Merrill bought at an inflated price in the waning days of O'Neal's reign.

"If you have a buyer for First Franklin at the price we paid for it," Thain says, as the audience begins to break into laughter, "please come see me afterward." He grins, slouching a bit, his hands in his pockets. His audience knows what that means: The O'Neal era is over.

Thain arrived at Merrill on December 1, fresh from four years of retrofitting the N.Y.S.E. His image in the media is that of a cerebral, humorless numbers man: He fired the stock exchange's barber, for heaven's sake. Yet following decades of stagnation capped by Dick Grasso and the scandal over Grasso's nine-figure paycheck, Thain was just the thing to end the melodrama, revive the exchange's public image, and shepherd it into the era of electronic trading and global markets.

As Thain was consolidating his changes, Merrill's mess was boiling over. On the surface, Merrill seemed to have the same disease that afflicted the N.Y.S.E.: bad management and a screwed-up compensation system, combined with stupidity, greed, and hubris.

Yet Merrill's problems were much more complex, thanks to a multilayered bureaucracy that contains every problem facing large banks in Lower Manhattan. In addition to its massive, market-sensitive brokerage network—the largest anywhere—its mix of businesses ranges from proprietary trading to hedge funds and includes private bankers, asset management, and a sizable investment-banking division. Although most sectors were trimmed to the bone under O'Neal and produce reliable profits, all are humbled, demoralized, and overshadowed by the firm's troubles. The investment bankers, for instance, had a strong year, but their division—lumped in with fixed income (including subprime)—recorded a pretax loss of $16.3 billion in 2007. By the time Thain arrived, the subprime debacle had pushed Merrill so far toward the brink of calamity that O'Neal was exploring a sale to Wachovia—a move he pursued, it is said, without board knowledge, which helped nudge him out the door.

Top executives at Merrill, keenly aware of the multitude of subprime lawsuits, naturally cringe at the idea of providing a chapter-and-verse recitation of Merrill's misdeeds. But a top company official intimately familiar with subprime issues points to a fundamental blunder in the way that risk was assessed and supervised as a major reason for the buildup in subprime securities. Added to that was a compensation system that paid executives on the basis of how well they grew revenues, without sufficient regard to the risk being taken on. "It's like me buying all those buildings out there just to get a little fee. It wouldn't make sense," the Merrill official says. Traders were paid on the basis of their own profit and loss, regardless of how the company was doing. That blinders-on approach helped create the organizational compartmentalization that Thain is seeking to demolish. "In the past, people had been compensated for their own business, their own P&L," Thain says. "We will move to compensate people first for how well the firm as a whole does"—an approach very much in the mold of Goldman Sachs.

Of course, even if people are paid well, nothing can make up for bad decisionmaking. The First Franklin deal is a prime example. In September 2006, with alarms already sounding about the mounting problems, Merrill bought the big subprime lender. Even then, the move was viewed as exhibiting all the strategic wisdom of a foray into Havana real estate in 1959. Jeff Kronthal, a leading Merrill fixed income executive, advised against the purchase, was fired for his advice, and was then rehired (by Thain) as a consultant.

Variations on the same phenomenon—huge, greedy bets on dicey ventures and risky financial instruments—had burned the Street, including Merrill, years earlier. "We'd all been through the mortgage area before," points out Win Smith, former chairman of Merrill Lynch International and the son of a co-founder of the firm. "We'd seen losses. We'd been through the liquidity problems of the Asian flu and the Mexican flu," he says, referring to the emerging-market debt losses that roiled the markets in late 1998, resulting in the failure of Long-Term Capital Management and big losses for Merrill and other banks.

Thain, who served as Goldman's representative on the L.T.C.M. board and helped design the bailout coordinated by the Federal Reserve, sees few parallels with the 1998 meltdown. But he notes that the loss of confidence in the markets after L.T.C.M., along with an aversion to complex derivative securities, resembles what's happening in today's climate. Still, he and other Merrill executives resist the temptation to publicly blame Thain's predecessor, whose spirit hovers over the World Financial Center whether they like it or not. Barely a year earlier, O'Neal, a rare African American in the upper stratosphere of corporate America, was widely lauded as a tough but innovative C.E.O. who adroitly managed Merrill in the tough post-September 11 environment. Merrill's headquarters stood on West Street across from the twin towers, and the company's divisions were scattered across the region after the attacks. "He led the firm through some tricky times during those years, in a very thoughtful way," says Rosemary Berkery, Merrill's general counsel, who occupied the same post under O'Neal.

But there was a flip side to the O'Neal persona, and press accounts of his tenure, even while singing his praises, told of personal slights and cruelties, such as a top executive who learned of his firing from a press release. "He was a mean person, a disrespectful person, and he drove out thousands of years of experience, which was ultimately what caused the subprime problem at Merrill," says Smith, who left during O'Neal's ascendancy in 2002 and is one of his leading critics. Pretty much anybody besides O'Neal would be welcomed by the ex-C.E.O.'s detractors, of which there appear to be quite a few. Thain—no doubt intentionally—has made the comparisons easier with his nice-guy offensive. "What he recognized early on is that this is a people business. And the first thing you have to do is create a culture where people respect one another, where anyone working in any level of the organization understands that the C.E.O. is a guy who respects people," Smith says.

Around the firm, Thain has been making nice at every opportunity. Two days before the earnings announcement, he flew out to Arizona to meet with Merrill's branch managers, who were having their annual conclave. Bob McCann, who as head of Global Wealth Management was boss of the brokers, recalls that Thain arrived in the afternoon, came to an evening cocktail party, and stayed for two and a half hours—all the while, McCann points out, wearing a name tag. The next morning, Thain appeared in shirtsleeves (and name tag), spoke for 20 minutes, and took questions for 25 more. Then he stayed to listen to other speakers before flying back to New York on Wednesday night. The office bush telegraph worked overtime. "People want to know that the person at the top is someone they can relate to, talk to, feel like he gets and understands the culture," McCann says. "In that week, with all that was going on, he took the time to go out there."

The word culture is mentioned a lot at Merrill, in much the same way that nostalgic New Yorkers talk about the Polo Grounds. In a conscious effort to mimic Goldman Sachs, O'Neal had set out to overhaul the old Merrill culture, which he viewed as an inbred network that favored contacts over merit. He ratcheted up Merrill's trading ventures, bought subprime securities, and instilled a dog-eat-dog ethos in place of the old backslapping collegiality.

Yet here is Thain, a 24-year company man at Goldman before he headed to the N.Y.S.E., working hard to reintroduce some of the old "Mother Merrill" culture that O'Neal detested—to the point of meeting with ex-C.E.O. David Komansky, who anointed O'Neal as his successor in 2001. Thain has also met with O'Neal, "simply seeking his thoughts and any insights or advice he had." He won't describe their talks beyond that, except to say that they were "constructive," and declines to discuss his predecessor's tenure, the only subject that prompts a "no comment" from Thain.

Thain clearly believes that his predecessor emphasized the wrong Goldman virtues. Sure, Goldman engages in high-stakes bets, but it is organized in a way that places maximum emphasis on risk management. O'Neal left out that part. So Thain's Goldmanizing of Merrill has a different flavor: He is removing the silos of the past, dismantling hierarchies and cliques that kept departments isolated from one another. His revamping of the compensation system is also in the Goldman way, a sharp departure from O'Neal's "every man for himself" pay structure. While the "everyone sups from the same bowl" approach has been known to prompt defections to hedge funds—where risk management is often viewed as a barrier to brilliance—it has so far kept Goldman from being ensnared by the complexity of the new generation of financial instruments.

If Thain comes across as a no-nonsense, small-town type, it's because that's what he is. His father, Alan, the son of a dairy farmer, struck out on his own to study medicine. Dr. Thain practiced on Main Street in Antioch, Illinois, about 50 miles north of Chicago, near the Wisconsin border. Antioch was a conservative town in the '50s and '60s when Thain was growing up, with some light industry, skiing at Wilmot Mountain, and summer homes on Lake Catherine.

Thain and his two younger brothers were star wrestlers at Antioch Community High School. John's wrestling coach, Ted DeRousse, remembers him as a dedicated but not gifted athlete whose grit got him elected team captain. The coach describes Thain's mother as "a little bit of a thing" of Greek heritage, who was apparently the wrestling equivalent of a soccer mom, attending all of her sons' matches and urging them on. Says DeRousse, "You could hear her voice: 'Johhnnnn!'"

Thain was no bookworm. On a typical high-school day, he recalls, he would wrestle from 3 p.m. to 6 p.m. and then serve on the ski patrol till 11 p.m. He attended the Massachusetts Institute of Technology, where he studied engineering, joined the wrestling team, and belonged to a fraternity, before going on to Harvard Business School.

During a summer break from M.I.T., he worked as second-shift supervisor of the Ivory soap line at Procter & Gamble, in Cincinnati. Later, at Harvard—after a summer interning at E.F. Hutton in Manhattan, crunching numbers for the bankers—he was ripe for the plucking when Goldman Sachs recruiters came to the campus. Thain began his career at Goldman as a corporate-finance associate and rose steadily through the ranks, moving up the investment-banking ladder until he got his first big break, one that in retrospect seems fateful: He and two other young Goldmanites were chosen to establish a mortgage-backed-securities division reporting to the head of fixed income, a rising star named Jon Corzine.

It was the mid-1980s, and Goldman was playing catchup with Salomon Brothers, whose mortgage business was booming under the legendary Lewis Ranieri. Thain became one of the first traders to buy and sell securities packaged from mortgage loans. He turned the unit into a profit center.

Subprime derivatives were still in the future, but even in their earliest incarnations, mortgage securities were riskier and more complex than conventional bonds. As a result, Thain's new mortgage business was placed under the watchful eye of not only Goldman's extensive risk-management apparatus but the wider Goldman partnership. Thain, though now two jobs removed from Goldman, still describes it with reverence. "It's a culture based on teamwork. It's a culture based on excellence. It's a culture based on being a great meritocracy. People get ahead based on how good they are, not who they know or how well they can play politics. And that culture is very strong and very successful."

Thain moved rapidly through the Goldman system. "John was basically known as the plumber. He was the one who knew where all the pipes run in the organization. So he was a very, very useful guy," says one Goldman veteran. Thain became treasurer in 1990, chief financial officer in 1994, and in 1995 moved to London to become head of the firm's European operations. "I think that the most substantial part of his career was the years he spent in London. When he came over here, he truly understood the global marketplace," says Marshall Carter, former chief executive of State Street Corp. and now vice chairman of NYSE Euronext. After his return, Thain cemented his reputation as a quiet but respected Goldman apparatchik, living in Pelham, New York, with his wife and four children and avoiding the spotlight.

Even when he became embroiled in high-level intrigue, Thain stayed in the background. He and other top Goldman execs, Hank Paulson and John Thornton, were pitted against Thain's old mentor and friend, Corzine, who was C.E.O., in a messy power struggle in 1998 and 1999. Much of the infighting revolved around an effort to take Goldman public, something Thain opposed at the time. After much sturm und drang, Corzine was out, Paulson was in as the new C.E.O., and Thain was named co-president with Thornton. Thain, who changed his mind about the initial public offering once Corzine was out of the picture, points out that "the discussion wasn't about me. The discussion was about the conflicts between Jon Corzine and Henry Paulson." He also says that "it was a difficult time and not characteristic of my time at Goldman Sachs." Thain's Goldman ties are likely to come in especially handy today, with Paulson at Treasury working to sort out the winners and losers of the subprime crisis.

In 2003, by which time Thain had become Goldman's president under Paulson, something remarkable was happening three blocks away at the N.Y.S.E.: The exchange was under siege.

The N.Y.S.E.'s troubles centered around its C.E.O., Dick Grasso, who may reasonably be described as the last of the Big Board's drawbridge keepers. While he was known to the public mainly because of his shaved head and frequent media appearances, his main job was to keep Fort N.Y.S.E. from being attacked by the enemy—the increasing number of electronic-trading networks and Nasdaq, which wanted its business. Grasso presided over an antiquated, trading-floor business that had been abandoned by pretty much every other stock exchange in the world. The Big Board hung on out of inertia, carefully nurtured regulatory barriers, and an ownership structure in which power resided with the 1,366 exchange members, who had a vested interest in maintaining the status quo on the floor. Many were retirees who lived off revenue from leasing their stock-exchange seats. If trades could bypass the floor via electronic platforms, who needed the trading floor? No floor, no lease income, no condo in West Palm Beach.

Just about everyone heavily involved in the exchange—from large brokerages and institutional investors to rapid-fire day traders—was becoming fed up. Execution times were faster at electronic competitors, like Nasdaq. And it didn't help that the exchange was regularly convulsed by scandals that continually replayed the same theme: traders on the floor profiting illegally from their access to customer orders.

The N.Y.S.E. might have continued to operate as usual, regulatory moats intact, had word of Grasso's $140 million pay package not leaked out. By the end of the summer of 2003, Grasso was out, former Citigroup C.E.O. John Reed was interim chief, and the de-Grassofication of the exchange had begun. Reed appointed a new board, which started the hunt for a permanent C.E.O.

Help was needed—someone who knew the markets but was as clean as a bar of Ivory soap, someone as calm as Grasso was volatile. Reed asked Marshall Carter, who had just been appointed to the new board, to meet discreetly with Thain and sound him out about the job. To avoid gossip, Carter invited Thain to his Fifth Avenue apartment at 6:30 a.m. and said he'd cook him breakfast. Thain sneaked in the back entrance. "So John thought he was going to get home fries, an omelet, bacon, and everything. I cooked him a bagel, and then he asked for jelly and cream cheese. I didn't have any,” Carter says. (Thain is anxious to set the record straight: "I would never have jelly with a bagel. I've lived in New York for 30 years.")

Thain took the job shortly before Christmas 2003 at a substantial pay cut. It was an opportunity not just to run his own shop—Paulson did not seem to be going anywhere at the time—but also to rescue an American institution that was in deep trouble. Though comparisons between Merrill Lynch and the N.Y.S.E. are treacherous, Thain's early days at the exchange offer a glimpse of his management style. There was no major bloodletting in the top executive ranks, no morale-crushing layoffs. Some Grasso loyalists kept their jobs; others were eased out. But Thain did not shrink from kicking the exchange's business model to the curb and cauterizing its culture. He moved quickly to institute electronic trading by pursuing a merger with Archipelago, an electronic-trading firm, and followed that with a globalizing merger with Euronext N.V., the European stock exchange consortium. Goldman had a 15 percent stake in Archipelago and was an adviser to that firm as well as to the N.Y.S.E.—a glaring three-way conflict of interest that drew fire from some stock exchange members, a few of whom put up a fight. The deal went through anyway. The members divvied up $400 million in cash as well as a 70 percent stake in the merged company, amply soothing their indignation, and in March 2006 the exchange became the NYSE Group, its stock trading under the symbol NYX. While the deal has prompted some grumbling and questions about whether Thain overpaid, he had little choice: The exchange had to modernize or risk being completely overtaken, and a merger was almost certainly the only option.

More changes, small but symbolic, followed. The Luncheon Club, a mahogany-paneled symbol of a bygone era, with its chandeliers and hunting scenes on the walls of the men's room, was shuttered. The elderly house barber, who was paid $24,000 a year, was let go. It would have been a small thing to keep him, a nice gesture. But firing the barber sent a message: The old N.Y.S.E. was dead. "The barber was a very nice guy who'd been there for a very long time," Thain says, but "it's difficult to argue that a publicly traded company needs to have its own barber."

Keeping the barber might have won some goodwill, but the cold fact was that Thain didn't need the goodwill of the stock exchange floor. His next move, after concluding the Euronext merger, went to the heart of the organization. He attacked the N.Y.S.E.'s long-standing practice of disciplining its own members, who once owned the exchange and still had a substantial stake in the company. The whole arrangement stunk to such an extent that it was almost funny—sort of like a homeowner's being obliged to fine himself for not fixing the sidewalk. Thain cut a deal with regulators of Nasdaq, and in July 2007 the exchange's regulatory apparatus merged with the National Association of Securities Dealers, becoming the Financial Industry Regulatory Authority.

The ostensible reason was efficiency, but the effect was that of removing a pebble from the N.Y.S.E.'s shoe and lodging it in someone else's. Thain "took the worst aspect of an exchange, which is enforcement, and unloaded it on N.A.S.D.," according to one prominent securities lawyer. At N.A.S.D., "they were thinking, 'Oh good, we're getting enforcement,' while he's thinking, 'Why do we want to be in this line of business?'"

When the Euronext merger was completed in April 2007, the premier U.S. stock exchange had become a division of a multinational corporation. Measured by the yardsticks cherished during the Grasso years, the U.S. was falling behind: In May 2007, the exchange's share of trading in N.Y.S.E.-listed securities dipped below 50 percent for the first time. Nasdaq, meanwhile, boasted a 37.7 percent market share in N.Y.S.E. stocks in January, compared with 8 percent or so in the mid-1990s and 13.7 percent in 2004.

But Thain didn't care about the yardsticks from the Grasso era. Market share was eroding anyway, so he let it slide. His goal was to turn the N.Y.S.E. into a global, diversified, high-tech market, with trading in all major currencies. And he accomplished that. "When I joined the exchange, 15 percent of the exchange's volume was electronic," he points out. "When I left, about 85 percent was electronic."

A triumph at Merrill could earn Thain a place in the history books—while O'Neal and even Grasso are forgotten—and, quite possibly, land him a top spot in a John McCain administration. (An early and enthusiastic McCain supporter as far back as 2000, Thain was named a national finance committee co-chairman in December 2006 and is rumored to be among the contenders for Treasury secretary should McCain win.)

Thain is trying to head off future trading fiascoes at Merrill by personally overseeing the firm's risk management. He has named a former global-risk officer, Noel Donohoe (from Goldman, of course), as co-chief risk officer. But fixing yesterday's problems won't be enough. No matter what Thain does for Merrill, its biggest nightmare is likely to be the ongoing regulatory onslaught brought on by the subprime crisis. It is, it seems, almost the natural order of things. Whenever there is a scandal affecting Wall Street, Merrill always appears to be the most visible target, whether it is Enron or the analyst imbroglios. Merrill is a symbol, an icon.

General counsel Berkery says Merrill has not been contacted by prosecutors working on the U.S. Attorney's probe. She points out that it's not unusual for prosecutors and the Securities and Exchange Commission—which is, naturally, investigating Merrill's subprime business—to share information. But even if the criminal inquiry goes nowhere, it's clear that Merrill will be dragged through the mud in the months ahead, its new and straight-shooting C.E.O. notwithstanding.

The spotlight will be on Thain, the former high-school wrestler. Wrestling is a sport for the patient, of waiting for an opponent's mistake. At Merrill, the adversary is a ghost—the blunders of the past, with consequences that may not yet be fully apparent.