Merrill CEO Out After Big Mortgage Loss

Brokerage's $2.24B Quarterly Loss Biggest In 93-Year History; Ouster Was Expected

(CBS/AP)  The still unfolding mortgage-related credit crisis has claimed its biggest corporate casualty so far: Merrill Lynch CEO Stan O'Neal.

The announcement Tuesday that O'Neal is retiring immediately came days after the world's largest brokerage posted a $2.24 billion quarterly loss, its biggest since being founded 93 years ago.

"They bet very heavily on the mortgage market," Forbes senior editor Neil Weinberg told CBS News correspondent Anthony Mason, "and when the mortgage market started to crack, they got left with a huge amount of bad debt."

Merrill Lynch & Co. did not name a replacement for O'Neal, whose ouster had been expected for days. Instead, board member Alberto Cribiore will step in as interim nonexecutive chairman and head of the search committee to find a new CEO.

Despite the third-quarter loss, analysts consider the vast majority of Merrill's business to be in perfectly fine shape. But, whoever replaces O'Neal will have to clean up the segment that is not in good order - Merrill's investments in subprime mortgages and other risky types of debt.

Board members and staff had expressed unhappiness with O'Neal's management, reports CBS News correspondent Randall Pinkston, especially his strategy of investing in securities backed by risky loans and sub-prime mortgages, which resulted in a loss of $8 billion.

"They weren't managing their risk essentially very well. And as a result it all came home to roost," Dr. Charles Geisst, a professor of Finance at Manhattan College, told Pinkston before O'Neal's retirement was announced.

O'Neal, 56, who rose to power five years ago, was known for shaking up top management and putting a greater emphasis on riskier bets, rather than the safety of just selling stocks.

That strategy - which handed Merrill Lynch record results during the market's peak - came with a heavy cost during the tumultuous third quarter.

O'Neal ultimately shouldered the blame for the earnings miss. With his retirement, he becomes the biggest executive casualty of the credit crisis that swept global markets this summer.

Many on Wall Street are counting on the Federal Reserve to bail them out by lowering the prime rate this week, a move that may help some borrowers but could further weaken the dollar and drive oil prices even higher, reports Pinkston.

"It tells us, if history is of any use to us at all, that we are probably facing a recession within the next year, if not sooner," Geisst said.

So neither Fed action nor management housecleaning at Merrill Lynch may be enough to prevent a downturn for the economy.

A key barometer of consumer sentiment dropped to the lowest level in two years Tuesday, igniting concern that the upcoming holiday shopping season would be lukewarm.

"Mr. O'Neal and the board of directors both agreed that a change in leadership would best enable Merrill Lynch to move forward and focus on maintaining the strong operating performance of its businesses, which the company last week reported were performing well, apart from sub-prime mortgages and CDOs," Merrill Lynch said in a statement.

CDOs, or collateralized debt obligations, are complex instruments that combine slices of different kinds of risk. It was Merrill's bet on CDOs, and the subprime mortgages underpinning many of them, that proved to be O'Neal's downfall.

Analysts have said this week that whoever replaces O'Neal may have to write down another $4 billion worth of bad investments in the fourth quarter.

Merrill Lynch said that co-presidents and chief operating officers Ahmass Fakahany and Gregory Fleming will continue in those positions. Fleming will lead Merrill's front office, such as its brokerage and investment banking sides. Fakahany, a close confidant of O'Neal, will lead back-office functions such as finance and human resources.

It was not known how much O'Neal would receive as an exit package, though there have been some reports it would be nearly $200 million. He was paid roughly $48 million salary in 2006, and had $160 million in stock and retirement benefits, according to James Reda, founder of compensation consultancy James F. Reda & Associates.

O'Neal is the descendant of a former slave, and grew up in poverty in Alabama before rising to become one of the highest-ranking African-Americans on Wall Street. He worked his way through a Harvard business degree by working at General Motors Corp., and in 1986 joined Merrill as a banker in its junk-bond department.

His elevation to CEO was seen by some as an experiment by the company's board, most of which have since retired. O'Neal mostly held positions on the client-contact side, which goes against the trading background most of its other CEOs had.

Among those said to be considered for the job outside the firm are NYSE Euronext CEO John Thain and BlackRock Inc. CEO Laurence Fink. Fleming is also considered a possible internal candidate.

[vancouverboo]

Note this paragraph from this article:
Many on Wall Street are counting on the Federal Reserve to bail them out by lowering the prime rate this week, a move that may help some borrowers but could further weaken the dollar and drive oil prices even higher, reports Pinkston.
That pretty much sums it up.

[hypnotoad72]

Will he be given a golden parachute, much like how most CEOs that do stupid things still manage to get?

And lowering the interest rate will not help. Not when the result of which is a falling dollar, the observation of which compels stocks to fall. Does the Fed want a weaker dollar? We''ve seen the repercussions of the previous cut. To do so again would ultimately be futile. Mr and Ms Joe Welfare have to live with their mistakes. Why not CEO and CFO Subsidy?

[jon_mccain]

Wow! A 200 million dollar "exit" package for doing a **** poor job. The average American is lucky to receive 8 weeks salary when they outsource his job.

[shanev137]

People with bad credit have ruined the whole world.

[allunknowing]

Wow, even when he gets fired, he gets madd paid. And the rich get richer. Awesome.

"You''re fired! But lucky you, your lottery ticket was a winner! Don''t forget to pick up your severence pay; $200 million dollars"

I hope he has to make a lifestyle change to manage that salary cut. Must be hard living on $48,000,000 a year.

[oscarez]

ozilot ... Well said. To bad MBA Bush is calling the shots at the FED. He is running the government like it''s a bankrupt company and will do whatever it takes to stay in business. The rich get richer, the rest of us lose or 401K''s. I fear Merrill Lynch & Co. is just the tip of the iceberg.

[alphaa10-2009]

This is the priceless moment when our free-market capitalists go into hiding. Gone is their brass band and confetti parade. Once again, they must acknowledge Killer Capitalism.

They blame it all (of course) on the feeding frenzy of speculation, of being the last in the herd, and first to be set upon by market mechanics. "Too bad," Bernanke says. "How unfortunate."

But fortune has little to do with it. Capitalism is not a benevolent system in the raw, and everyone knows it is kill-or-be-killed (often zero-sum) by design.

While those who still can play the market claim ours is the greatest country and economic system in the world, they cannot account for a huge and widening gulf between a monied minority, and what is left of the American middle class.

Nor can they explain why third-world scenes haunt our major cities, with people eating garbage and sleeping over grates (if they are lucky). Or why Americans spend 2.5 times more than EU citizens for what is called "healthcare"-- yet our infant mortality lags behind Cuba.

Capitalism is not a doctrine delivered on golden tablets from above, but a system whose imperfections require constant effort to overcome. To the True Believers of left and right goes this challenge-- we must renovate the American economic system to benefit all Americans by something far better than promises of "rising tides" and trickledown effects.

[random_radar]

The fact that he gets $200,000,000 for causing $8 billion in losses doesn''t hurt anyone but the stock owners. I don''t care how much he gets paid since I don''t own the stock.

If you own the stock, its your own problem because, well, you are an owner and you need to either manage your CEO better or choose better investments.

[jon_mccain]

The fact that he gets $200,000,000 for causing $8 billion in losses doesn''''t hurt anyone but the stock owners. I don''''t care how much he gets paid since I don''''t own the stock.
Posted by random_radar

Random, his bad decisions (for which he was generously rewarded) will eventually filter down to the employees in the form of layoffs.

[jon_mccain]

This is the priceless moment when our free-market capitalists go into hiding. Gone is their brass band and confetti parade. Once again, they must acknowledge Killer Capitalism.
Posted by alphaa10

They can still insource an Indian band on H1Bs and throw Chinese confetti.

[oscarez]

Posted by shanev137
People with bad credit have ruined the whole world.

$915 billion in credit card debt and negative savings rates in the U.S.. $95 dollar crude oil. Well folks it was fun while it lasted.

[walt1944-2009]

It has been learned that O''Neal is being offered a job in the Emperor Bush II Court doing public relations work for FEMA! The Emperor Bush II expects "Stannie" to do a great job and to ultimately move on to become CEO at the World Bank following in the footsteps of other grand appointees to that lofty position by the Great Emperor Bush II!

SIG HEIL, BUSH!!!

[ov442]

Well its already gotten rediculous.
The Federal government is supposed to protect the consumer from predatory business and business that proceeds with illegal and ill-conceived plans and money making schemes.
It comes in the form of law, which establishes oversight committees, and Federal departments whose job it is to keep business entities in check.
Its time they began to do their job again. This 7 yr hiatus from keeping these industry whackos from using created accounting and business practices to both fraud the public and fool the stockholders needs to end so we can restore order in our Great nation again and stem the tide of more economic disaster from occurring

[reporter2111]

A Picture Is Worth A Thousand Words...
www.poconocommunitynews.com

[hdinsight]

koko98 POSTED --"There they go again. The company goes downhill and the black guy gets blamed. Nice severence package though."

---uh...koko98, did you read the article regarding Stan O''Neal''s business practices? No one''s "blaming the black guy." (That sounds racist.) The CEO of a major corporation is being held ACCOUNTABLE for record losses while he was at the helm. His termination is well justified. Unfortunately, his overly generous severence package does NOT reflect his pathetically poor performance. In my opinion, this sort of greed-induced risk taking behavior has put the entire economy in jeopardy. Many more Americans will be homeless thanks to this sort of business "leadership." What does O''Neal care? He''s to receive a quarter of a BILLION dollars for his service. Something is very wrong in America.

[mediapreachr]

I heard this guy will get a severance package worth 200 mil.Is this true?

[afmca]

If I promise to be only 1/2 as inept as O''Neal would Merrill Lynch promise to pay me only 1/2 of his severance. This is the biggest problem in America today - the only people that are being forced to be responsible are the people that cannot afford to be. Only in corporate America could a person fail so miserably and be rewarded so handsomely.

[grimloxz]

Wait, am I reading/seeing this right? Even the Black CEO gets fired first! LOL! Wow...

(now here comes the hate dudes...)

[oleander8]

"It was not known how much O''Neal would receive as an exit package, though there have been some reports it would be nearly $200 million. "

(VOMIT......)

[brianbwb-2009]

Wall street is the same as Las Vegas, and the *** game in a tenement, a betting game. Ante up, place your bets, and take your chances, that is all it has ever been. Corporations ask for your bet, promoting themselves with fake valuations and dodgy past performance statements, slipshod, and blatantly fraudulent accounting. CEOs and upper level management are grossly overpaid, taking large bites out of profits that should be going to the bettors, and even when the company is in the red, these vampires compound the loss by not reducing their compensation.

It would be time the investors take their companies to task, punishimg severely those companies who pay such ridiculous salaries to paper jockeys. I say would be because it may already be too late, the collapse of the US economy is imminent, the corruption of both business and government has eaten the nation''s foundation like termites eat houses.

Our house is about to cave in.

[brianbwb-2009]

I should have said "a dice game", apparently the game called "craps", is considered by the censor bot to be obscene.

[greeneyes222]

"It was not known how much O''Neal would receive as an exit package, though there have been some reports it would be nearly $200 million. "

Now there''s a punishment for you. They sure showed him.

[standlee5]

outrageous. Who decides who will be king. The shareholders should stage a hostile takeover of their own.

[oscarez]

Posted by standlee5
"Outrageous. Who decides who will be king. The shareholders should stage a hostile takeover of their own."

Most public traded companies have a poison pill takeover defense to keep this from happening.