Merrill’s iron driver

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As a serious golfer such as Stan O’Neal knows only too well, one bad hole can ruin an otherwise great round. This week, Merrill Lynch’s chief executive had the equivalent of a triple bogey: $8bn of writedowns in the investment bank’s mortgage securities business – a Wall Street record – leading to losses of $3.5bn in the third quarter.

Some of Mr O’Neal’s board directors have argued that he should be allowed one mistake – even this big – given the turnround Merrill has achieved under his leadership. But at least one director is pressing for his removal and has discussed possible successors from outside the company.

Mr O’Neal’s position has not been helped by a cold personal style that critics say has left him with few senior allies in the company and many vocal critics among the ranks of executives who have left the bank since he took the reins six years ago. “There are a lot of people out there who have been waiting a long time for Stan to trip up,” says one supporter.

In person, Mr O’Neal is cool, quiet and thoughtful, often pausing for some time after a question to consider his answer. Even his admirers admit he is “not warm and fuzzy”.

Detractors do not mince their words. “He is the most brutal person I have ever worked with,” says a former senior executive. “Wall Street is a tough place and he pays people – and himself – well. [Mr O’Neal earned $48m last year – the second-highest package of any Wall Street chief executive.] But he lacks a human touch and it has got worse as he has got more powerful.”

Mr O’Neal’s reputation as a tough, not to say ruthless, manager dates back to his response to the 2001 attacks on New York’s World Trade Center, which drove the company from its headquarters nearby. As the rest of America was linking arms in sorrow and solidarity, Mr O’Neal, then chief operating officer, stepped up a cost-cutting programme that resulted in 24,000 job losses.

“We had no choice but to move quickly,” Ahmass Fakahany, a close associate who is now co-president, told the FT later. He estimated that without the action Merrill would have plunged to losses of $3bn in 2002.

Mr O’Neal has not worked very hard on his public image, making few public appearances and giving hardly any interviews in the past three years. Nor is he a fixture on the New York social circuit, preferring to spend time with his wife and teenage twins. “He has decided he is not going to have a public relations campaign to persuade people he is a nice guy,” says one executive. “He is sharp and cool, but not any more tough or demanding than a Jack Welch [the former head of General Electric].”

Mr O’Neal has argued that he needed to be tough to tackle serious problems Merrill faced when the stock-market bubble burst in 2000. These included a clubby culture that looked back nostalgically to the long history of “Mother Merrill”. The company had a chip on its shoulder when it looked at the industry leaders, say his allies, and parts of the group had developed a tolerance of “mediocrity”.

In a meeting with employees on the day of the results, Mr O’Neal hit back at critics who accuse him of being a heartless bean-counter who manages Merrill by numbers. He told staff that one of the disadvantages of being a public figure is that “they caricature you”.

“Some of the characterisations of me are of someone who doesn’t really care, who is not emotionally involved or connected. I am deeply, deeply connected to this firm.”

Even Mr O’Neal’s sternest critics admit he has great strengths, including a sharp intellect. He is also popular with clients, with whom he spends two-thirds of his time. “He is very smart, very well-briefed and really listens to what you have to say,” says one client who declines to be named.

In addition to criticism of his personal style, detractors say the huge losses announced this week are the result of a strategic mistake Mr O’Neal made when financial markets started to recover after the bursting of the dotcom bubble.

Initially, his main focus was on building Merrill’s market-leading private-client arm, a steady business with strong long-term growth prospects that investors valued highly.

But faced with booming capital markets, driven by very low interest rates, he turned opportunistic, investing in Merrill’s trading operations and encouraging the organisation to take more risks.

Winthrop Smith, the son of a Merrill Lynch founder who was once seen as a potential chief executive before quitting in 2001, says Mr O’Neal’s mistake was “the opportunistic pursuit of short-term high-margins profits, which worked . . . for a while”.

Mr O’Neal’s appointment as chief executive in 2002 was a radical departure for a company that had historically been run by Irish-Americans who began their careers on the brokerage side of the business.

The son of a farmer and grandson of a former slave, Mr O’Neal grew up in a house in rural Alabama without running water. He attended a segregated one-room school.

When he was 13, his family moved to Atlanta where his father worked at a General Motors plant. Mr O’Neal joined GM on the assembly line and rose up the executive ranks – via Harvard Business School – before joining Merrill Lynch in 1986.

This week’s losses are the most serious setback in Mr O’Neal’s remarkable career. It was made much worse by the fact that, two weeks ago, Merrill estimated its writedowns at less than half the figure it announced on Tuesday.

The shares took a beating and had fallen on Thursday by 33 per cent in six months. They recovered some ground on Friday as it emerged that some board members were calling for Mr O’Neal to go and had been angered that he had approached Wachovia, the fourth-biggest US bank, about a possible merger without the board’s permission.

One problem facing directors who want change is that there are few strong internal successors. But board members have already discussed potential external candidates including John Thain, chief executive of the New York Stock Exchange, and Larry Fink, head of BlackRock, the asset management company in which Merrill has a 49 per cent stake.

Mr O’Neal may have made only one mistake, but on Friday he was fighting to avoid the fate of so many other former Wall Street chief executives – the chance to spend more time on his putting.

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