Crash of the titans: The rise and fall of Stan O'Neal

November 4, 2010: 3:30 AM ET

The last CEO of Merrill Lynch had an imperial style that worked superbly in good times, but the sudden announcement of a $4.5 billion write-down punctured the myth of Stan O'Neal's infallibility, and ultimately led to his fall.

By Greg Farrell, contributor

Every CEO has his own management style, which tends to evolve from his personality. At Merrill Lynch, Stan O'Neal's style grew out of his self-confidence. Not only had he proven himself to be smarter than his rivals for the top job earlier in the decade, O'Neal was more ruthless.  After becoming CEO in 2002, he systematically eliminated any executive who had enough experience to challenge him, or marginalized him in such a way that the executive left. Few people who reported to him in his early years as CEO were surprised to learn that O'Neal's favorite TV show was The Sopranos.

O'Neal's imperial style worked superbly in good times. Merrill's four-year run of healthy profits from 2003 to 2007 only served to reinforce the notion that the CEO was the all-knowing master and commander of Merrill Lynch.

But the sudden announcement of a $4.5 billion write-down on its assets in the first week of October punctured the myth of O'Neal's infallibility. On the morning of Friday, October 5, the firm's top finance people and O'Neal huddled to go over the final language that would be part of the earnings warning sent out just after 9 a.m. The finance group, headed by CFO Jeff Edwards, had come up with the $4.5 billion number for the write-down on the firm's CDO portfolio. Once the language was in place, the group dispersed, in the belief that the work was done.

But after a subsequent discussion involving Gary Carlin, who headed Merrill's internal controls, Edwards and the investor relations people decided to err on the side of caution and tell investors that the CDO write-downs related to an "incremental" impact in the quarter. At 9:06 a.m., the announcement went out on the wires. Sometime around 9:07 a.m., O'Neal called Eric Heaton, the treasurer, and screamed at him, demanding to know who had inserted the word "incremental" in the release. Normally a man of calm and businesslike demeanor, O'Neal laced his tirade with derivatives of the word "fuck," which seemed out of character. Then the CEO turned his fury on Edwards, unleashing another fusillade of f-bombs on the CFO, whom he blamed for adding the word "incremental." The earnings warning was supposed to let investors know that Merrill Lynch was on top of its problems, O'Neal hollered. Using a qualifier like "incremental" suggested that the firm didn't even know how bad its problems were.

In the days following the announcement, he was no longer the same old Stan, the intimidating but decisive leader who had righted a listing ship after the terrorist attacks of September 11, 2001. Subordinates who used to fear his displeasure now looked on as their cold-eyed, confident CEO moved around his offices tentatively, as if he'd been temporarily stunned in the boxing ring by a punch to the head. O'Neal was still standing, but his bell had been rung.

Days later, on October 18, O'Neal did something highly unusual: He asked [Greg] Fleming for help. Even as Fleming had ascended the management ladder under O'Neal's rule, becoming president of investment banking in 2003, then co-president of the entire firm in 2007, he was never part of O'Neal's inner circle. O'Neal asked Fleming if he still had a good relationship with Ken Thompson, chief executive of Wachovia Bank in Charlotte. "Yes," said Fleming.

For more than a decade, like its crosstown competitor, BofA, Wachovia had been a serial acquirer of other banks. Merrill Lynch was Wachovia's primary advisor. In most of those deals, Fleming had been Merrill's lead banker, working with Thompson and other Wachovia executives to bring complicated transactions to fruition. Thompson had taken a liking to Fleming.

"I want you to ask Ken if he'd be interested in a strategic combination between our companies," O'Neal said. A few weeks earlier, when O'Neal met with BofA's Ken Lewis, Merrill's problems seemed manageable and so O'Neal didn't see any pressing need to move forward in that direction. But now that the blinders had been removed and O'Neal had developed an understanding of the magnitude of the problems facing Merrill, biding his time was no longer an option. He had to make a move, and quickly. Fleming said he'd get on it. Over the next two days, Fleming spoke with Thompson and the chief financial officer of Wachovia, Tom Wurtz. He explained Merrill's situation, which was not yet desperate, but distressed. Thompson was keenly interested, and said he'd bring the matter to the attention of his board. After all, the chance to acquire Merrill Lynch, one of the premier brands in financial services around the globe, was a once-in-a-lifetime opportunity, Thompson said.

The Merrill Lynch board of directors meeting convened at the St. Regis Hotel in Midtown Manhattan that afternoon. O'Neal now made his case to the directors. The problems on Merrill's balance sheet could get far worse, and there was no way to quantify the potential losses at the moment, he said. He had lived through the Long Term Capital Management crisis in 1998, and once liquidity dries up, Merrill Lynch could get into deep trouble in almost no time. Given this situation, it was only prudent for the firm to look at potential partners, O'Neal explained. That's why he had reached out to Wachovia. "Stan, this is a great franchise, an iconic brand," said board member Alberto Cribiore. "It's as famous as Coca-Cola. We don't want to be sitting with a bank in Charlotte."

"I don't like to make decisions with my back against the wall," declared board member Armando Codina. "What has taken place with Wachovia?" "It was just a phone call, just a feeler," O'Neal said, before indicating that it was Fleming who was the primary contact with the Charlotte bank.

Codina turned to Fleming and demanded to know what had transpired. "It was just a casual call," Fleming replied. "Nothing's really happened." "Do you think I was born on a banana boat?" Codina said with a snarl. "Do you take me for a fool? Tell me what has happened." "It was only three conversations," said Fleming, flustered by the attack. "I made that phone call at the request of the CEO, who works for you. Talk to him if you've got a problem. What would you like me to do when I get a request from my chief executive officer, ignore him?" O'Neal sat mute, a few feet away, as Fleming defended himself. It was but the latest example of why the CEO inspired so little loyalty in the company.

Later that evening, the outside directors voted to retain their own legal counsel, Robert Joffe of Cravath, Swaine & Moore. To anyone familiar with the world of corporate governance, a board's decision to retain its own attorney, separate from the company's general counsel, is a sign of trouble. It would be akin to a wife, following a disagreement with her husband, hiring a lawyer to represent her interests. Even if the word "divorce" is never uttered, the act of hiring an independent lawyer represents an irreparable breach of trust in the relationship.

The next day, the board reconvened at Merrill Lynch headquarters downtown. During various meetings, board members were accompanied by Joffe, a top ranked securities lawyer who had represented boards of directors in numerous corporate battles over the previous two decades. Finally, around 2:00 p.m., O'Neal returned to the boardroom. He ascended the stairs from the executive floor up to the "chairmen's gallery" on thirty-three, where portraits of his nine predecessors hung on the walls. Then he entered the boardroom. Joffe, the outside counsel, was sitting in his seat—the power seat—in the middle of one side of a long table. As Joffe stood up to excuse himself, Codina invited O'Neal to return to his usual spot at the table.

"No, I can see that it's been taken by someone else," said O'Neal as he plopped himself down in the chair closest to the door. The previous evening, he had used scare tactics with the board, trying to paint the worst portrait imaginable of Merrill's financial condition in order to compel them to follow. By now the board, which had been taken over by Cribiore, had become satisfied that Merrill Lynch's position was not so dire. Cribiore announced that he'd conducted his own investigation and concluded that Merrill Lynch could work its way through the problem with the right leadership. What's more, Cribiore had swung Ann Reese and Codina around to his view.
"How do you know we won't be back here in February and the Federal Reserve has lowered rates and the value of the assets will come back?" Cribiore asked.

"Maybe that's true," said O'Neal, "but I don't care to run a business where I have to depend on outside events for things to work out." Codina and Reese insisted that Merrill's problems could be solved. O'Neal, who no longer saw eye to eye with either one, despite having appointed them to the board, got fed up with his decisions being questioned. "Well, if you're not going to listen to me, maybe I'm not the right person to lead this company," he said in an insolent tone. That was it, as far as Codina was concerned. O'Neal's arrogance appalled him.

On Thursday, October 25, Stan O'Neal was in a no-man's-land. He wasn't sure if his board still wanted him, or if he wanted to stay on and fight through the big turnaround challenge that lay ahead. Sensing O'Neal's isolation, Larry Fink, chief executive of BlackRock, the huge asset management group that was 49 percent owned by Merrill Lynch, invited him out to dinner that evening.

O'Neal was grateful for the dinner invitation and met with Fink at Sistina, a high-end Italian eatery on the Upper East Side of Manhattan, favored by the Wall Street elite. Midway through the meal, O'Neal received a call from Fleming.

"Stan, look at your BlackBerry," said Fleming. O'Neal checked his messages and saw one from a reporter at The New York Times, who said the paper was planning to run a story the next day describing his overtures to Wachovia. Did Merrill Lynch have any comment? "I've got to go," said O'Neal to Fink as he stood up and walked out of the restaurant.

O'Neal spoke to his head of public relations, Jason Wright, but both men knew there was nothing they could do to kill the story, especially since it was accurate. O'Neal wondered who would have leaked the news, since the disclosure of the Wachovia overture was certain to damage him irreparably. It could have been Fleming, Cribiore, or even Fink, each of whom stood to gain from his ouster. Or it could have been Bob McCann, the ambitious head of Merrill's private client business, who had run afoul of O'Neal in the past.

That evening O'Neal called Armando Codina, who made it clear that the revelation of the talks with Wachovia had undermined O'Neal's position. Codina and Cribiore pointed out that despite his vaunted executive skills, O'Neal's credibility in the marketplace was now gone. No one would invest billions of dollars in Merrill Lynch while he was still running the place. One by one throughout a long, arduous call, most of the directors came to agree with Codina and Cribiore and recommended a change in leadership at Merrill Lynch. Finally, in a show of unanimity, board members Carol Christ, Judith Jonas, and Virgis Colbert joined Codina and voted to remove Stan O'Neal. In just six months, O'Neal had gone from being arguably the most successful CEO in the ninety-three-year history of Merrill Lynch to the first one ever pushed out by a hostile board vote.

--Adapted from Crash of the Titans, Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America, by Greg Farrell. Reprinted with permission, Copyright 2010, Random House.

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