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.