Merrill Lynch Gives Stan O'Neal the Boot; Now What?

Last Updated Oct 30, 2007 7:52 PM EDT

trojan-piggy-bank.jpgMerrill Lynch posted a $2.3 billion net loss for the third quarter -- its biggest since its founding 93 years ago -- thanks to risky investments in subprime mortgages. The brokerage firm allowed chief executive Stan O'Neal to "retire" after the board learned of his secret merger talks with Wachovia. (The many ex-employees whose jobs were slashed during his cost-cutting tenure are no doubt chuckling a little.) Once the dust settles, Merrill will hopefully have both a new leader and a new strategy in place.

Forbes comments on the strategic belly-flopping that's spelled disaster for the company:

...Merrill has vacillated between wanting a big presence in fixed income and commodities to pulling back, and then flooding back into the space. It piled into derivatives in the last couple of years, seeing an opportunity to stake a big claim. It piled into subprime mortgages last year at the peak of the housing market, buying lender First Franklin (nasdaq: FFHS - news - people ) in December from National City (nyse: NCC - news - people ) for $1.3 billion.

O'Neal has more recently expressed regret for those moves, saying, as he did in 2002, that the firm had moved too far, too fast.

"They are the next trade guys," quipped analyst Richard Bove of Punk Ziegel, of Merrill's hummingbird approach to the business. "They can't hold onto a strategy. They need to stumble on something they can embrace."

Analysts say the company's in overall good shape, despite the third-quarter loss. (And O'Neal's not doing too poorly, either; although a Merrill spokeswoman said he wouldn't receive a severance package, his retirement benefits and stock awards total around $160 million.) The company may report more losses in the fourth quarter, but if the board redfines it corporate strategy, sticks to it, and chooses a successor wisely -- someone who knows better how to value its balance sheet and manage its risks, who doesn't treat the company like his own personal piggy bank -- Merrill can recover.

(Trojan Piggy Bank image courtesy of AndWat, CC 2.0)