The head of the Wall Street investment bank Merrill Lynch was on Monday night negotiating a severance package tipped to be as high as $159-million after a risky strategy of betting billions on American mortgage-backed securities came disastrously unstuck.
Stan O’Neal, chief executive of Merrill, has told friends that he intends to resign after losing the confidence of his boardroom colleagues following the biggest loss in the bank’s 93-year history.
Nicknamed the ”thundering herd” for its bull logo, Merrill has estimated its liabilities at $7,9-billion from the summer’s global financial volatility and analysts believe the figure could increase to $12-billion.
A formal announcement of O’Neal’s departure was delayed on Monday night as behind-the-scenes wrangling continued in New York. But the scale of his pay-off, much of which is guaranteed by his employment contract, has reignited a debate about so-called ”rewards for failure”.
According to calculations by pay consultancy James Reda & Associates, the ”golden parachute” awaiting O’Neal includes $30-million in retirement benefits plus $129-million in stock and options. The figures are on top of his pay of $48-million last year.
Critics say such sums are wholly unjustifiable. Frederick Rowe, president of a US pressure group, Investors for Director Accountability, said: ”It’s objectionable that someone who blows things that badly should get this amount of money.”
The first black man to run a Wall Street bank, O’Neal was appointed in 2002 after a spectacular rise from an impoverished childhood on a small-town cotton farm in Alabama. The grandson of a slave, O’Neal began his career on a General Motors car production line and his background sets him apart from the rest of Wall Street’s elite.
He has made no secret, however, of his enthusiasm for wealth — in an address to Howard University’s opening convocation three years ago, O’Neal spoke of the joys of money-making: ”This is a world of ‘haves’ and ‘have nots’ and if you want to make a difference — it helps to be a ‘have’.”
His tenure at Merrill Lynch has come to an end amid allegations that he inspired a gung-ho, risk-taking culture and was far from straightforward when the bank’s hefty punts on the credit market began to go awry. ”There were decisions made by Merrill to take on more risk, in order to close the gap with some of its peers,” says Matt Albrecht, banking analyst at Standard & Poor’s in New York. ”Those decisions came from the top floor.”
When he won the top job, O’Neal declared that he wanted to end Merrill’s reputation as a maternalistic, careful money manager — nicknamed ”mother Merrill”. He expanded in trading and in leveraged financing — including funding for private equity deals. Among its buyouts were investments of $4,2-billion in Scottish & Newcastle’s pub estate and $2,9-billion in the high-street chain Debenhams.
Fatefully, he also oversaw an expansion into mortgages, approving a decision to push Merrill’s expertise in repackaging and re-selling home loans on the debt markets. This has proven ill-conceived, as a dip in the American housing market this year prompted a financial seizure as less affluent homeowners defaulted on subprime mortgages.
Merrill was the only Wall Street bank to go into the red over the crisis and its struggle to manage risks contrasted sharply with the fortunes of rival Goldman Sachs — which enjoyed a spectacular 80% leap in profits as it judged the temperature of the credit markets accurately.
Wall Street insiders say the true reason for O’Neal’s abrupt exit is not simply that the bank’s risk-taking strategy failed — but that the chief executive was reluctant to own up to the cost of this failure.
Early this month, a Merrill profit warning put the bank’s exposure to the credit crunch at $4,8-billion. But quarterly results disclosed a figure of $7,9-billion — and analysts at Deutsche Bank are forecasting an increase of a further $4-billion.
”Mr O’Neal is being penalised for not being as forthright as people would have liked,” says Albrecht. Even to his boardroom colleagues, O’Neal was reportedly cagey. A source told the Wall Street Journal that he did not ”walk the board through the reasons for the write-offs” in the way he should have done.
Any bank’s reputation depends on rock-solid confidence from the markets in its financial stability. Losing this, as Northern Rock can attest, is disastrous. Merrill’s conflicting signals alarmed investors and the last straw was a report that Mr O’Neal had privately approached the head of a much smaller bank, Wachovia, about a merger. Merrill’s board, it seems, knew nothing of this manoeuvre, which gave the false appearance that the bank was in need of a rescue.
”You sure as hell don’t want to sell something on a bailout,” said a retired Merrill chief executive, Daniel Tully, this weekend. ”And if you were thinking of that, you would sure as hell discuss it with the entire finance committee and the entire board.”
O’Neal’s likely pay-off is the latest in a long line of controversial settlements secured by outgoing corporate bosses whose performances have left investors dissatisfied. In January, the do-it-yourself retailer Home Depot had to pay $210-million to sever contractual ties with its chief executive, Bob Nardelli. Last year, the drugs company Pfizer ditched its boss, Hank McKinnell, with a payoff of $200-million.
In Britain, the sums are smaller, but are still sufficient to arouse anger. EMI’s former chief executive, Eric Nicoli, recently received £3,3-million to leave the struggling music firm.
Democrats in Washington are trying to rein in excessive remuneration by allowing shareholders to vote on corporate pay — a measure opposed by the White House. ”The average chief executive makes more money before lunch than the average worker earns all year,” said representative Kathy Castor of Florida in a recent congressional debate, arguing that legislation was necessary to ”send a message about pay packages that boggle the mind”.
Rags to riches
From his art deco office on the 32nd floor of the World Financial Centre opposite ground zero, the outgoing chief executive of Merrill Lynch has a panoramic view of Manhattan. Not bad for a man who grew up in a one-room wooden farmhouse. ”It’s pretty cool isn’t it?” Stan O’Neal (56) told one interviewer. ”Every once in a while I have to pinch myself.”
Until recently, O’Neal’s career was the stuff of feel-good Hollywood screenplays about the American dream. His childhood home was a cotton farm in the tiny Alabama community of Wedowee. But he was born in Roanoke because the local hospital would not treat black patients.
O’Neal later moved to Atlanta and got a job on a car production line where he was selected for the General Motors Institute, an in-house university. He won a scholarship to Harvard Business School and went on to GM’s treasury department in New York. In 1986, he was headhunted by Merrill Lynch.
By the time the twin towers fell, a block away from Merrill’s offices, in September 2001, O’Neal was the bank’s chief operating officer and he won plaudits for keeping things running from temporary premises. He was named chief executive a year later. – Guardian Unlimited Â