Speculation Over Fate of Merrill Lynch CEO Swirls Merrill Lynch CEO Stan O'Neal is being forced out. The only thing up for negotiation is the terms of his departure. The firm logged a $2.3 billion loss in the third quarter and an $8.4 billion write off largely due to the subprime credit debacle. He also made overtures on the potential sale of the business without alerting the board.

Speculation Over Fate of Merrill Lynch CEO Swirls

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Good morning.

SAM HAYES: Good morning.

MONTAGNE: Now, Merrill Lynch last week announced it's writing off nearly $8 billion. I mean, that's a stunning sum of money and it's 42 percent of the firm's revenue for the better part of this year. How did that happen?

HAYES: Well, it was a part of the new plan of Mr. O'Neal to move in to areas of revenue generation that were higher profit margins. And he did underwrite the largest number of new collateralized debt obligations that any firm of the street did and earned about $800 million in the process. But he - and the process took on a very large amount of those bonds into his inventory. And when the subprime loan scandal broke, the value of that inventory plummeted and he was left with this huge loss which had to be taken as a loss for the whole corporation.

MONTAGNE: So the risk that he took on - because it involves subprime mortgages and those various instruments - that risk was very much more risky than Merrill Lynch was used to?

HAYES: Used to, and in fact now, it was more than it's understood that it had taken on as a risk. They were caught flat footed. They did not believe they had that much of a - an exposure. And the exposure was even underestimated as a little as a week ago. And so it's come as a great surprise to the internal management and, of course, to Mr. O'Neal. And worst of all, it's come as a great surprise to the board of directors. The board of directors do not like to get negative surprises.

MONTAGNE: So it was also a surprise, as you just said, to Stan O'Neal himself, apparently. Although, isn't it the job of a hard-hitting financial leader to take a gamble? Was it that he went too far or was it that he didn't understand what he was doing, apparently?

HAYES: I think it was the latter. He was in the business of taking risks, and he had been urging his organization to move into higher profit margin areas, even when there was the prospect of greater risk. But neither Mr. O'Neal nor the people who generated this business for him understood that they were moving out dangerously on the limb.

MONTAGNE: Now, when Stan O'Neal came to Merrill Lynch, he had a sort of interesting both personal and professional history. He was an outsider in a couple of ways.

HAYES: That's correct. He was not a stockbroker and he came from General Motors where he had been a finance professional. And he rose rapidly when he got to Merrill Lynch in the late '80s, and got to the point where he was tapped as being one of the future potential leaders for the business. He was able to beat out some other contenders for the top slot. And then he did a house cleaning which he fired a large number of the executives at the top who had been there for quite a long time, including some of his own supporters.

MONTAGNE: When Stan O'Neal was made president five years ago, he made a point of changing the culture of this company. And Merrill Lynch has - was known as Mother Merrill with all the implications of sort of nurturing relationships. How much of that leadership style had to do with the board pushing him out - of course the board was mostly his appointees?

HAYES: Well, that's right. I think the answer is that it wasn't that he made these changes, because he had the support of the board in making those changes. And as you point out, the board was a largely a bored of his own creation. So it was not that which was the problem. It was that the strategy which he undertook backfired. And when you have a large group of investors, outside investors, most of whom are institutions, very sophisticated and very demanding, the board recognized that, particularly in the wake of Sarbanes- Oxley, which is a new rule that put special burdens on the board, they had to move.

MONTAGNE: I understand that last week Stan O'Neal asked Wachovia bank whether it wanted to buy Merrill Lynch. What effect did that have?

HAYES: That was an absolute no-no. You do not make overtures on the potential sale of your business without alerting your board that you're making the overture. That was totally off the reservation.

MONTAGNE: Sam Hayes is an investment banking specialist. He's been teaching at Harvard Business School for 30 years. Thanks very much.

HAYES: It's my pleasure.

MONTAGNE: And you can read a profile of Merrill Lynch's Stan O'Neal at npr.org.

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