Merrill’s CEO is Doomed

Merrill Lynch announced pretty bad news last week in the form of a $7.9 billion write-down related to subprime mortgages and derivatives based on them. CEO Stan O’Neal, who is also chairman of the board of directors, is almost certain to leave over this and his unauthorized merger discussions with Wachovia. His will be the most important head to roll in this fiasco, but if it is the only one that rolls at Merrill, the company will be badly served.

Last Wednesday on a conference call with analysts, Mr. O’Neal almost took full responsibility, “I’m not going to talk around the fact that there were some mistakes that were made.” Talking around the fact is exactly why he used the passive voice. However, the Wall Street Journal and others say he will pay for the losses with his job. The reason is the erosion of top traders’ bonuses and fee generators' smaller pay packets. Without the rain-makers, Merrill would dry up and blow away.

Mr. O’Neal, who did a great deal to turn Merrill around in the last 5 years, might have been able to survive this is there were some inkling that the subprime market were the only issue. The board, though, learned that he had approached Wachovia without the board’s approval or knowledge. That makes them look like idiots, and on Wall Street and elsewhere, that’s no way to impress people.

The media and history say that Merrill’s strategy in the subprime market was Mr. O’Neal’s doing. But as CEO and Chairman, he wasn’t the one making trades or inventing mortgage-backed securities instruments. Clearly, no one at Merrill ever asked, “what if these loans go bad?” Someone in that part of the company should have. And an omission like that is hard to forgive or forget. Mr. O’Neal should have some company in the unemployment line.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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