Stan O’Neal Builds a Straw Man

Let’s shift gears a bit, and move from Goldman to Merrill.

Specifically, Merrill Lynch’s retired deposed CEO, Stan O’Neal. About 18 months after getting the boot, O’Neal has crawled out from under his $161 million rock. He found a sympathetic ear in Fortune contributing writer William Cohan, who assisted his spinning a new narrative as to his days at Mother Merrill.

Not surprisingly, the new version that portrays him in a much more favorable light.

O’Neal now joins a long list of former Masters of the Universe trying to burnish their badly tarnished reputations by taking their “Who?  Me?” tour on the road.  As with just about all of the others, it is unlikely to work.  The essence of O’Neal’s argument:  “Hey, I might have run the company into the ground, but it was that damn Cribiore who prevented me from getting a better price for my shareholders.”

From Cohan’s article story:

The magnitude of the [CDO] problem “hadn’t been apparent in ways it should have,” O’Neal tells Fortune in his first on-the-record interview since he was forced to resign in October 2007.

As O’Neal dug into the issue from his vacation home off the coast of Massachusetts, he was flabbergasted by what he discovered. “A few things became clear,” he says. “One is the complexity of it was far beyond what I would have imagined. Second, the number of people who actually understood the aggregated view of this — not just in terms of size and scale but the potential complications associated with it — were few and far between.

When O’Neal finally came to grasp what the “aggregated view” meant, he realized his firm was facing an increasingly dire threat.

The NY Times is apparently buying some of the fertilizer that Mr. O’Neal is selling:

“The revelation of this [Cribiore’s opposition to a sale of the company] could go some way to salvaging Mr. O’Neal’s reputation which, Fortune wrote, had been reduced to the tag line: “C.E.O. who played golf alone while his firm struggled to survive.”

Contrary to O’Neal’s take on the matter, the magnitude of the problem was apparent. At least, it was to Merrill people like Jeff Kronthal and his colleagues, who voiced their concerns about the degree of risk the firm was taking on.

They were summarily kicked to the curb.  (See here, here: “…many have said that had Kronthal and the other sacked fixed-income veterans not left, the bank might not be in the shape it is today. According to the Journal, Kronthal received a standing ovation when he appeared on a Merrill trading floor yesterday.” (here and here. )

Kronthal was subsequently asked back by O”Neal’s replacement, John Thain.

Sorry, Stan, take your hoocoodanode elsewhere, because there were folks who knew, and you canned them, which is exactly why “the number of people who actually understood the aggregated view of this — not just in terms of size and scale but the potential complications associated with it — were few and far between.”  Most of them had involuntarily left the building, and you’d surrounded yourself with yes-men.  Puh-leeze.

And by the way, who was responsible for the stellar $1.3 billion purchase of subprime mortgage originator First Franklin at the top — the absolute pinnacle — of the real estate market?

All references to the purchase have been purged from the press release archives at Bank of America, but are still readily available through The Google, and this excerpt from the press release appears in a previous BP post:

“First Franklin is one of the nation’s leading originators of non-prime residential mortgage loans through a wholesale network.  [Ed. note: And this was considered a good thing?] […]

“This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area [Ed note:  Remarkably, they’re proud to announce they’ve bought not just one, but four steaming turds.] and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services.” — Dow Kim, president of Merrill Lynch’s Global Markets & Investment Banking Group.”

Merrill, of course, was shuttering First Franklin not long after buying it, and subsequently whined like babies that National City had “misrepresented” the deal (“You didn’t tell us it was this big a piece of shit, or we would have paid even more for it!”).

By the way, did I mention that O’Neal had a Chief North American Economist, one David A. Rosenberg, who was warning of an inflating housing bubble in late 2004?  But what did Rosie know, eh?  Well, he knew this:

In this report, we assess the likelihood that the housing market has entered into a “bubble” phase.

But I digress.

The gist of the story is that due to the intransigence of one board member — Alberto Cribiore — the ultimate price Merrill fetched ($50 billion) was about $50 billion less than what O’Neal tried desperately to get as the firm’s positions deteriorated.  Of course, this begs the question as to why Merrill had to be sold in the first place, and the reason for that — the firm’s toxic CDO book — rests squarely on one person’s shoulders, and it ain’t Alberto Cribiore. Mr. O’Neal can say what he’d like about the extreme, heroic steps he took to sell the firm at a premium price, but the fact remains that no sale would have been necessary if he’d been a competent leader.

From the Fortune Q & A:

How did Merrill Lynch end up with so much exposure to the CDOs that ultimately sank it?

It was never my intent that we would take risk other than the intermediation risk in the mortgage business. If you package, structure, and sell what you buy, or if you originate it yourself, presumably you can control the quality of the credit a little bit better. But if you do that, you’re going to have warehousing risk and inventory risk. … It should have been more like $10 billion for us and probably was around $10 billion at the end of ’06, but by April of ’07 they’d run to $45 billion. It didn’t grow much from that point, but it was too late.

“They’d run to $45 billion.”  “They,” as if “they” had done it on their own.  How did “they” do it (in just a few months, no less), and how did “they” ramp up by an astonishing $35 billion without you knowing about it?  Or, put another way — if you did know about it, you were incompentent, and if you didn’t know about it, you were negligent.  Your call.

As the firm was on the verge of its sale to Bank of America (December 2008), Win Smith (as in Merrill Lynch, Pierce, Fenner & Smith) spoke at the gathering of shareholders on the day of the vote:

Today did not have to come.[…]

This is the story of failed leadership and the failure of a Board of Directors to understand what was happening to this great company, and its failure to take action soon enough.

I stand here today and say shame to both the current as well as the former Directors who allowed this former CEO to wreak havoc on this great company.

Shame on them for allowing this former CEO to consciously and openly disparage Mother Merrill, throw our founding principles down a flight of stairs and tear out the soul of the firm.[…]

Shame on these Directors for allowing this former CEO to rid the firm of thousands of years of experience. Shame of them for allowing this former CEO to surround himself with many people who did not have the perspective of other market cycles and the experience of time. Shame for allowing this CEO to surround himself with many people who did not share the same values that made us great and appreciate our winning culture. Shame on them for allowing this CEO to cut costs and businesses so severely and bluntly for the sake of short term earnings that he cut out future growth. Shame on them for allowing him to over leverage the firm and fill the balance sheet with toxic waste to create short term earnings. Shame of them for allowing good people like Dan Bayly and a few others to be used as scapegoats to settle the US Government’s Enron case against Merrill Lynch and for allowing these wonderful human beings and loyal Merrill Lynchers to go to Federal Prison unjustly. Fortunately, the Court of Appeals overturned the sentence.[…]

Shame, shame, shame for allowing one man to consciously unwind a culture and rip out the soul of this great firm. Shame on them for allowing this former CEO to retire with a $160 million retirement package and shame on them for not resigning themselves.

So reviled had O’Neal become — inside the firm and out —  that I know of advisors whose clients, unsolicted, sold their shares in Alcoa when O’Neal was appointed to that company’s board.

In retrospect, how prophetic that Stifel Nicolaus CEO Ron Kruszewski told Registered Rep in 2007, “Merrill Lynch will go before Stifel Nicolaus.”  To the extent O’Neal was even aware of that comment, he probably dismissed it with an arrogant, pompous, egomaniacal smirk.

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