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.

[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.

[standlee5]

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

[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.

[brianbwb-2009]

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

[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.

[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......)

[grimloxz]

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

(now here comes the hate dudes...)

[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.

[mediapreachr]

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

[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.