Bloomberg News reports that Merrill Lynch (NYSE: MER) added $2.9 billion to the $5 billion worth of write-offs it had already announced. And it reported a loss of $2.24 billion, or $2.82 a share, compared with net income of $3.05 billion, or $3.17, a year earlier -- this massively exceeds the 45-cent average loss estimate of 17 analysts surveyed by Bloomberg. Now questions are being raised about whether its CEO Stanley O'Neal will get the boot from Merrill's board.
What would be the case for booting O'Neal? He pushed Merrill into the risky area of subprime mortgages to get higher returns. While some of his lieutenants have paid the price for their supervision of this risk, Merrill's $7.9 billion cost -- which exceeds Citigroup Inc.'s (NYSE: C) $6.5 billion -- is 58% more than Merrill had projected a mere two weeks ago. And it calls into question O'Neal's judgment since he clearly did not anticipate the severity of the decline in the credit markets since July, after late mortgage payments from borrowers with poor credit histories surged.
And Merrill's problems don't end with subprime. The credit markets also forced Merrill to write down the value of leveraged buyout loans that the firm had to make after investors refused to finance them. Those devaluations totaled $463 million, after underwriting fees.
By underestimating credit losses by 58% a mere two weeks ago, I think O'Neal has demonstrated that he's the wrong person to see Merrill through the retrenchment that will follow his risk-seeking strategies. And who knows whether there'll be more unpleasant discoveries in future quarters.
If Merrill shareholders are lucky, its board will move faster to replace O'Neal than Citigroup's board is moving to find a better CEO than Chuck Prince.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in Merrill Lynch.
Before the bell: Stocks ready for a lower open after reaching 13-month highs
Ray of light: U.S. temp worker hiring increased by 34k in October
Goldman Sachs CEO Lloyd Blankfein pulls a Jeff Skilling in an interview
Reader Comments (Page 1 of 1)
10-24-2007 @ 11:38AM
BamBam said...
Both of these CEOs will likely seek safety in their mutual failure, blaming "market dislocations" rather than their own incompetence.
10-24-2007 @ 12:57PM
pc72 said...
They both need to go. It is completely unacceptable for financial companies with the experience of Merrill ( http://www.newsvisual.com/newsvisual/2007/10/experience-on-m.html )or Citibank ( http://www.newsvisual.com/newsvisual/2007/10/management-expe.html ) to post numbers like these. Both of them are clearly out of their league and need to take responsibility the results that occurred on their watches.