Crashing on Wall Street, Merrill’s Risk-Taker A Reign of Contradictions and a Fall Stunning in Its Speed and Ferocity

By Landon Thomas Jr. and Jenny Anderson

The six-year reign of E. Stanley O’Neal at Merrill Lynch has been one of contradictions. He was a loner in an industry that places a premium on relationships. And he pushed Merrill into risky investments despite his experience as chief financial officer, where managing risk was one of his responsibilities.

Now, after an $8.4 billion write-off against profit and an unauthorized merger approach to a rival bank, Wachovia, O’Neal has lost the confidence of his board and was expected to resign as early as Monday as chairman and chief executive. Directors, having decided O’Neal should leave, met through the weekend to start to figure out who should succeed him.

O’Neal’s fall has been stunning in its speed and ferocity. Last spring, Merrill stock was trading around $95 a share, and O’Neal was being celebrated for having transformed Merrill into a more aggressive, risk-friendly institution. Last week, the stock sank to as low as $59 a share.

The events underscore that on Wall Street, even the highest paid chief executives with handpicked boards are not immune to the combined furies of investors and employees.

His fall is also a reminder of how dangerous it is to tinker with a firm’s culture. Having declared the idea of a nurturing Mother Merrill passé, O’Neal has discovered how angry and powerful a spurned mother can be.

O’Neal’s ascent – through hard work and the cultivation of crucial relationships – was unusual for its swiftness.

He also had the ability to be at the center of major financial disruptions without taking on significant blame.

He was a senior banker in the junk bond division when the firm had a $470 million write-down; he was a co-head of Merrill’s institutional business in 1997, a few months before the Asian financial crisis roiled the markets; and he was chief financial officer in 1998 when the firm suffered a quarterly loss because of bond trading and exposure to the troubled hedge fund, Long Term Capital Management.

People who have worked with O’Neal, 56, describe an aloof, calculating man who in his 20 years at the firm made few friends.

While he has been quick to forge temporary alliances with superiors like Herbert Allison Jr., a former president who was his first mentor, and Arshad Zakaria and Thomas Patrick Sr., who championed his candidacy for the top job, he has been equally quick to cut ties to them.

Some of his closest relationships date to his days in the treasury department of General Motors, where he was first noticed as a smart, ambitious executive. It was at GM that he met his wife, Nancy Garvey, who was an economist and remains one of his closest confidantes, and John Finnegan, the chief executive of Chubb, whom he recruited to the Merrill board in 2004.

But colleagues say there was a part of O’Neal that seemed to resist this ascent. Twice, he came close to leaving the firm, and he was notorious for his propensity to fall into a funk when things were not going his way.

A golf fanatic – his handicap is 9 and he belongs to four country clubs – he often played alone, in addition to the usual rounds with clients and a circle of friends outside Merrill.

But colleagues also say that at times of crisis, he can display energy, acumen and leadership, as he did in the days after the terrorist attacks on Sept. 11. Then Merrill’s president, O’Neal worked countless hours as the firm struggled to regain its footing.

For many, especially those far from the intrigues and complexities of Wall Street, Merrill Lynch stands for solidity and good faith, principles that were rocked with the events of the last months. But old Merrill hands feel that the firm will survive, despite the notion that it may become vulnerable to a takeover.

“This is a resilient franchise,” said Stephen Hammerman, a former vice chairman of Merrill who supported O’Neal’s bid for chief. Hammerman said he felt concern for Merrill Lynch employees who have seen the stock drop.

For a time, Merrill’s business flourished as O’Neal took on more risk and made deep cuts to improve efficiency. In 2006, Merrill made $7 billion from using its capital for trading for itself and clients, compared with $2.2 billion in 2002.

Some riskier businesses that the firm got involved with, like private equity and lending, fared well in the crisis this past summer.

Merrill’s exposure to the volatile and ultimately toxic market for complex debt instruments called collateralized debt obligations exploded to more than $40 billion from a billion-dollar range about 18 months ago.

Initially, the increased risk was a boon – part of a shift from the firm’s classic position as an asset gatherer with an excellent stock underwriting business to a bank that had become increasingly hooked on the high-octane, high-risk returns that came from investing its own money.

But in July, when the credit markets froze, it was clear that Merrill stood to lose a lot of money. As the market deteriorated, and Merrill faced bigger losses, tensions were beginning to boil over. In contrast to past Merrill chiefs who cultivated a clubbier style of management, O’Neal was not averse to letting rival antagonisms fester.

According to people briefed about the situation, O’Neal wanted to fire his chief financial officer, Jeffrey Edwards, and replace him with a longtime friend, H. McIntyre Gardner.

At the end of July, Ahmass Fakahany, who despite his lack of any trading experience had assumed broad responsibility over the firm’s risk exposure, sent an e-mail message to Charles Rossotti, the director in charge of Merrill’s risk committee and a former commissioner of the Internal Revenue Service, according to one person briefed on communication.

In the e-mail message, which he copied to O’Neal, Fakahany told the board of the exposure.

With the markets worsening, Fakahany and Fleming sent a three- page letter to directors on Aug. 9, titled “Board Market Update End July Results: Note from Fakahany and Fleming.” The letter discussed the mounting losses and the exposures, explaining that significant deterioration had occurred in July, according to the person briefed.

The letter was also sent to O’Neal and Merrill’s general counsel, Rosemary Berkery. The deterioration continued, ultimately reaching $7.9 billion in late October, almost $2.5 billion more than Merrill had announced only weeks earlier.

For the board, the fast accumulation of bad news came as a shock. A year earlier, directors had paid O’Neal $48 million and had basked in the glow of impressive results. Now the biggest loses in the firm’s 93 years were looming.

When directors were briefed late last week about O’Neal’s approach to G. Kennedy Thompson, the chief executive at Wachovia, they were furious. Fleming, who is close to Thompson, had followed up O’Neal’s initial overture, making it look as if it was more than just putting out feelers.

Even after that board meeting, it was by no means unanimous that O’Neal would have to leave. As late as Tuesday, the day before earnings, one director told a friend that it was a mistake to lump O’Neal with other troubled chief executives like Charles Prince 3rd of Citigroup, who is under scrutiny because of write-offs.

Internally, employees saw the merger talks as the last straw.

By late in the week, it had become clear that a change was needed.

At that point, three directors, all of whom had been recently selected by O’Neal, had taken the lead in considering life without him at Merrill – Finnegan, Rossotti and Armando Codina, a prominent real estate developer who knew O’Neal from the GM board.

Originally published by The New York Times Media Group.

(c) 2007 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.