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THE MORTGAGE MELTDOWN

Merrill chief rumored to be on verge of ouster

October 27, 2007|Walter Hamilton | Times Staff Writer

NEW YORK — Speculation swirled Friday that the chief executive of Merrill Lynch & Co. could be ousted from his job in coming days, making him the highest-ranking Wall Street casualty of the sub-prime mortgage meltdown.

The possible departure of CEO Stan O'Neal raised the question of whether the jobs of other chief executives could be in jeopardy.

None of Wall Street's biggest bosses have lost their jobs in the yearlong home-loan crisis despite mortgage-related securities losses at their companies totaling about $25 billion.

O'Neal's future at the largest U.S. brokerage was thrown into doubt Wednesday after New York-based Merrill disclosed a much bigger-than-expected loss on mortgage securities. His status appeared to weaken further Friday after a report said O'Neal, who is also Merrill's chairman, was in hot water with the rest of his board because he approached a rival bank about a potential merger without telling his fellow directors.

"I think he's gone," said Jeff Arricale, manager of the T. Rowe Price Financial Services fund.

Merrill's stock shot up $5.19, or 8.5%, to $66.09 in the wake of a report that O'Neal could be forced out as early as this weekend.

Potential successors are said to include Laurence Fink, chief executive of money manager BlackRock Inc., which Merrill bought a stake in last year; Robert McCann, the head of Merrill's huge brokerage force; and John Thain, the chief of NYSE Euronext Inc., the parent company of the New York Stock Exchange.

Rumors also spread that Merrill's board would put the firm up for sale, though several analysts called that unlikely.

A Merrill spokeswoman declined to comment.

O'Neal, 56, joined Merrill in 1986 and has been CEO for nearly five years. He is the highest-ranking African American on Wall Street, and the first African American to run a major investment bank.

"At the end of the day they are responsible for what the people below them do," said Anton Schutz, manager of the Burnham Financial Services Fund. "We have seen very senior people at those firms get the boot. We have yet to see a CEO get the boot."

Though most large Wall Street firms have recorded deep losses tied to the sub-prime crisis and resulting seizure of global credit markets, Merrill has been hit hardest. Its $7.9-billion mortgage-bond write-down was the largest on Wall Street, substantially more than the $4.5-billion hit that Merrill forecast less than three weeks earlier.

Including losses on bonds tied to troubled private-equity deals, Merrill's total write-down was $8.4 billion and its third-quarter net loss was $2.2 billion.

The huge write-down raised doubts about whether O'Neal's strategy of branching into lucrative but risky businesses had left the storied firm too vulnerable to losses.

Under O'Neal, Merrill became the largest player in so-called collateralized debt obligations, esoteric securities that are at the heart of the mortgage meltdown.

"Is Stan O'Neal supposed to be in the weeds and know everything that's going on? No," T. Rowe Price's Arricale said. "But he's supposed to have a risk culture that puts the brakes on at the appropriate times."

In recent weeks, as the scope of Wall Street's mortgage-linked losses came into better focus, several firms pushed out the heads of divisions that incurred losses. This month, Merrill fired the head of its fixed-income trading division and one of his deputies as well. Some critics have called the ousted executives scapegoats, saying it should have been the CEOs feeling the pain of failure.

The rumors about O'Neal's status intensified Friday after the New York Times reported that a top Merrill executive, with O'Neal's blessing, had contacted Charlotte, N.C.-based Wachovia Corp., which operates a large bank and brokerage, about a possible merger.

Board members were upset because they hadn't been informed about the overture, the paper reported.

Analysts said a Wachovia deal would be highly unlikely.

"One could argue that O'Neal broached the idea because he is desperate to make something good out of a difficult situation, and perhaps salvage his reputation in shareholders' eyes," David Trone, an analyst at research firm Fox-Pitt Kelton Cochran Caronia Waller, wrote in a note to clients.

"We can think of several other global financial institutions that would make a far better merger partner for Merrill Lynch," Trone wrote.

The alleged overture emboldened opponents within Merrill, who have long been critical of O'Neal's professional background and management style.

Unlike his predecessors, O'Neal did not come from Merrill's huge brokerage operation, the company's crown jewel, but rather its investment-banking division.

Since taking over as CEO in 2002, O'Neal has stirred controversy by forcing out a covey of senior executives.

As chief, O'Neal has earned mixed reviews.

He oversaw huge cost cutting and was credited with revitalizing what critics said had become a stodgy company.

He also won high marks for outbidding rivals last year to buy a stake in BlackRock, a highly successful asset-management firm.

His biggest misstep was the $1.3-billion purchase of sub-prime lender First Franklin Financial Corp. last year, which came even as mortgage defaults were mounting and cracks were starting to appear in the business of lending to homeowners with sketchy credit.

Other CEOs, including John Mack at Morgan Stanley, also embraced strategies that called for taking more risk in quest of greater profits.

But none have had losses the size of Merrill's, and the pain may not be over. Several analysts predicted that Merrill might have to write down an additional $4 billion or more of bad mortgage debt in the fourth quarter.

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walter.hamilton@latimes.com

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