Subprimes Next Victim: Merrill Lynch CEO

A death watch was underway on Wall Street on Monday as investors and financial analysts waited for what was rumored to be the imminent resignation or firing of Stan O'Neal as CEO of Merrill Lynch and Company.

Mr. O'Neal, architect of his company's plunge into the sub-prime mortgage market announced last week that Merrill Lynch would write-down $8.4 billion in the third quarter, 7.9 billion of which is directly attributable to problems with securities tied to subprime loans. This was the largest quarterly loss in Merrill Lynch's 94 year history and among the largest even on Wall Street.

In late September, Mr. O'Neal had briefed Merrill's board on the possible mortgage losses which he estimated at $4.5 billion. In early October Merrill fired two top bond executives and O'Neal named a new bond chief who quickly investigated and raised the estimate of mortgage related write-downs by 76 percent to $7.9 billion.

While the losses - and the speed with which they mounted after O'Neal first announced a problem - were largely responsible for O'Neal's pending ouster, his "aloof" management style was alienated many and he did not help his cause by other recent actions. Late last week he apparently approached Wachovia Bank to ask if that institution would be interested in acquiring Merrill Lynch. He did this without notifying or with the approval of his board of directors. Wachovia was not interested in the proposal but Merrill Lynch's board felt that such an overture cast Merrill's problems as desperate.

While O'Neal's departure has not been formally announced, Walt Street is treating it as a done deal and the company's stock surged last Friday on the mere rumor that he was gone. But some are wondering why O'Neal has been left as a scapegoat while executives at Citigroup and Bear Stearns which have also taken huge write-downs are still employed.

According to Randall Smith, writing in The Wall Street Journal, with Mr. O'Neal's ouster, the global credit crunch - triggered by a steep downturn in the value of subprime mortgages to the least-credit-worthy borrowers - reaches deep into many an executive suite. Damage across Wall Street has topped $27 billion, including $3.4 billion at UBS AG, a Swiss bank and has cast further doubt on the future of Citigroup Inc. Citigroup Chief Executive Charles Prince co-head of investment banking resigned after announcing mortgage-related losses.

Of course, as a collorary to the expression we are all familiar with, Mr. O'Neal's potential departure could be characterized as "No bad deed goes unrewarded."

Reuters reported that O'Neal could be the recipient of a golden parachute which, including his company holdings, retirement benefits, and a severance package "would easily top $200 million."

The company says that any severance agreements with its senior execs would only be triggered by a takeover and in other situations exit compensation would be determined by the board of director's compensation committee. Mr. O'Neal, however, has friends in the right places including a strong alliance with two members of the five-member committee; Chubb Corp. CEO John Finnegan and Brera Capital Partners founder Alberto Cribiore, both long supportive of O'Neal.

Even if he receives no severance per se, O'Neal owns a chunk of Merrill Lynch - common stock, options, restricted stock, incentive-based pay and pensions - that may total $90 million.