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Merrill Lynch, pioneer in sub-prime packaging sacks CEO

Monday, November 5th 2007 - 20:00 UTC
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The United States bank Merrill Lynch said that CEO Stan O'Neal had retired with immediate effect, in a move that followed intense media speculation following calls for his departure after the firm was forced to admit a 7.9 billion US dollars exposure to bad debt.

The write-off contributed to the firm posting a third-quarter net loss of 2.3 billion US dollars, its worst financial performance since 2001. Merrill said board member Alberto Cribiore would now chair a search committee to find a replacement for Mr O'Neal, who had been chief executive since late 2002, and chairman since 2003. Mr Cribiore will also serve as interim chairman. "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," said the firm in a statement. Mr O'Neal is paying the price for Merrill's over-exposure to bad debt in the US housing market, most specifically the crisis-hit sub-prime mortgage sector. The firm was one of the first to repackage such sub-prime housing debt into tradable securities. As mortgage defaults in this sub-prime sector hit record highs over the past year, on the back of higher US mortgage rates, the value of these securities plummeted. Analysts agreed that Mr O'Neal's departure had only been a matter of time. "Merrill Lynch had a huge misstep in risk management, and someone needed to pay the price," said David Killian of Stonebridge Investment Partners. "The company totally lost its way in risk management." Mr O'Neal admitted last week that errors had been made at the company. "I'm not going to talk around the fact that there were some mistakes that were made," he said. Mr O'Neal is the grandson of a former slave whose father moved his family from the cotton fields of Alabama to Georgia when he was young. He began his career at General Motors. His ability was spotted and he was sent to study at the firm's institute where he gained a degree in industrial administration. Mr O'Neal later graduated from Harvard with a degree in business administration. In 2006, a year in which the firm reported a record annual profit, O'Neal received a pay package valued at $48 million. In 2005, he took home $38 million. When he retired last week, O'Neal was able to walk away with $161.5 million in stock, options and retirement benefits, the company said last week. O'Neal joined Merrill in its investment banking division in 1986. He rose up the ranks, becoming president in 2001, chief executive in 2002, and adding the title of chairman in 2003. O'Neal took over leadership of the firm at a time when investors were dissatisfied with what they viewed as the firm's bloated structure. He fired scores of senior executives, eliminated 24,000 jobs, froze pay and steadily pushed out competitors for executive power, including colleagues who had supported his rise up the corporate chain. It was one of the biggest clean-outs in corporate history, and bitter feelings remain. However O'Neal's tenure was not without its triumphs. He is credited with helping to stabilize the company after the burst of the tech bubble, and he created the company's diversity and inclusion committee. Under his watch, shareholders saw Merrill's stock rise roughly 50 percent. Earnings rose. He led the bank's expansion into more exotic securities beyond its comfort zone of selling stock and providing brokerage services. But a scathing report from Credit Suisse does not praise his performance because it argues that Merrill Lynch more than tripled trading risk under his five-year reign. The bank's exposure rose faster than that of its rivals, according to the report by Credit Suisse. Credit Suisse compared the growth at nine banks of value-at-risk, the maximum a bank could expect to lose on any given day. While considered a crude measure, it is one of the few ways of comparing banks' trading risk. In 2001, when David Komansky was chief executive, Merrill Lynch had the lowest trading risk in its peer group with a daily VaR of $32m. By 2006, Merrill's VaR had jumped to a daily average of $71m, which ballooned to a daily average of $109m in the second quarter this year, an increase of 241%. The only other bank to increase its trading risk by a similar amount was Lehman Brothers, which also more than tripled its trading risk to $102m in the second quarter of 2007 compared with $33m in 2001. The average increase at the nine banks in the sample was 152%. Deutsche Bank's VaR in the second quarter of this year was $106m, compared with $37m in 2001. Goldman Sachs boosted VaR to $158m during the second quarter compared with $55m in 2001.

Categories: Economy, United States.

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