Merrill CEO's rise buckled by risky mortgages

The anticipated departure of Merrill Lynch & Co Inc Chief Executive Stan O'Neal would mark a surprising flameout in a career that had been impressive in its ascent.

The first African-American to run a major Wall Street firm, O'Neal appears to have lost his grip on the top job after misjudging subprime mortgage risk and presiding over the biggest quarterly loss in the brokerage's 93-year history.

O'Neal, 56, who is also Merrill's chairman, was expected to step down, possibly on Monday, from board pressure in what would make him the highest-ranking casualty in the U.S. subprime mortgage crisis.

Named CEO in 2002, O'Neal pushed the world's largest brokerage into new businesses, expanding its revenue base outside the United States. But he looked set to lose his job less than a week after the company wrote down $8.4 billion in the third quarter, mostly on bad bets tied to risky subprime loans and related securities.

The write-down, announced on Wednesday, triggered a $2.3 billion quarterly loss, or several times bigger than what O'Neal initially warned investors about earlier his month.

TWO DECADES AT MERRILL

In 1986, Merrill Lynch recognized O'Neal's star quality and plucked him from the ranks of the treasury office at General Motors Corp, where his father was a factory worker. O'Neal earned his stripes on the assembly line, too, alternating between the factory and the classroom to earn his degree. GM later paid for him to go to Harvard Business School.

Merrill Lynch put O'Neal in the firm's high-yield business. From there, he eventually became chief financial officer and, in 2000, president of the bread-and-butter private client business, where he oversaw an army of brokers and later became a cost cutter during lean times in the stock market.

Under O'Neal's leadership, Merrill Lynch devoted considerable energy to diversifying its businesses and expanding overseas. When Goldman Sachs Group Inc began raking in money by taking more proprietary risk, Merrill Lynch tried doing the same.

As recently as a month ago, O'Neal's hold on the company looked solid. Merrill Lynch seemed mostly removed from the subprime turmoil that buckled two hedge funds at Bear Stearns Cos Inc this past summer and led to the ouster of Co-President Warren Spector.

Past and current executives at Merrill say O'Neal could be autocratic at times and relied heavily on industry benchmarks -- such as comparing Merrill to Goldman Sachs -- to map out the company's strategy.

SUBPRIME STUMBLE

Through the second quarter, profit had quintupled, increasing at a compound annual rate of more than 40 percent since O'Neal took over Merrill Lynch. Since he became chairman, the company has had four consecutive years of record net earnings. He received about $48 million last year for his work.

But Merrill stumbled by paying $1.3 billion in December for subprime lender First Franklin Financial Corp. The timing and price of the acquisition puzzled Wall Street because defaults on risky subprime loans already were escalating and demand for pools of these loans packaged into securities was drying up.

Merrill Lynch's position as the leading underwriter of collateralized debt obligations -- complex securities that repackaged risk from mortgages and other collateral -- also presented considerable risk because they were tied to subprime loans, too.

On October 5, O'Neal shocked Wall Street when he said the company would take $5.5 billion in write-downs and post a quarterly loss, its first in six years.

But what really shook investors' confidence in O'Neal was that the write-down figure had mushroomed by nearly $3 billion by the time the company officially reported results last week.

FROM FARM TO BOARDROOM

Born in 1951 in the segregated South, O'Neal picked corn and cotton on his grandfather's farm in Wedowee, Alabama.

He was born in Roanoke, Alabama, because the hospital in Wedowee did not serve African-American families, O'Neal said years later in a 2001 profile for the Harvard Business School Bulletin.

Prospects for O'Neal's family brightened when they moved to Atlanta and his father landed a job at GM.

In 2002, Merrill Chief Executive David Komansky, a wisecracking Bronx native and Merrill Lynch lifer, tapped O'Neal, who had proven his mettle by cutting nearly 2,000 jobs in the brokerage group, as his replacement. It was a critical time for the company, as weak stock markets hurt the brokerage and investment banking business.

O'Neal did not return messages, left at his home and office.

But last week, he accepted blame for the quarterly loss during a tense conference with analysts, investors and reporters.

The bottom line is, we got it wrong by being overexposed to subprime, O'Neal said. And we suffered as a result of an unprecedented liquidity squeeze and deterioration in that market. No one, no one is more disappointed than I am in that result.