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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April 19th, 2010 at 10:39 am
But this is the way it is in just about EVERY big company today. Tell the truth at your peril. Most corporate “leaders” are looking for “yes men” (and women) and sycophants, not smart, competent people. It’s the Tyranny of the Incompetent (hat tip: leftback) writ large. Until that ends, this shit will continue.
April 19th, 2010 at 10:41 am
You’ve pretth much said it all about that scumbag.
But Napoleon was wrong about the possession of riches. Riches certainly ‘consist’ ,in their possession.
Their use is another matter entirely. Funny how famous men saying something gives their utterances the ring of truth when in fact they don’t know what in hell they are talking about.
April 19th, 2010 at 10:43 am
@mannwich
Hence the resounding success of, “Dilbert”, and “The Born Loser’s,” Thornapple.
April 19th, 2010 at 11:08 am
@flip: The truth not only hurts, it’s often amusing as a way of being somewhat therapeutic.
April 19th, 2010 at 11:23 am
In defense of Merrill, Stan O’ Neal, et al:
The incompetence at managing risk exhibited by the players in the financial system should be viewed as a symptom of a problem, not the problem itself. At bottom, the problem was the Greenspan Fed, from LTCM on. The problem was the Fed’s refusal, at any cost, to allow prices to decline, fearing that great bugaboo “deflation” more than it feared financial system implosion.
The financial system players simply acted rationally under the circumstances to maximize shareholder wealth as they saw fit at the moment. They didn’t create the system that made 3/2 dumps in the Inland Empire worth half a million dollars. They simply tried to game it, which is what all financial system players always try to do. They played poorly, not realizing that things that were unsustainable would not be sustained.
But the point is that the players didn’t build the field upon which they played. The Fed, and to some extent, the federal government, did. And everyone was happy with it, until they weren’t. What must be asked is what O’ Neal and other might have done differently? Had he resolved not to play, he’d surely have suffered immediate villification from the market (imagine Cramer shouting “What is up with these retards at Merrill that they won’t jump on the housing bandwagon?”) that would likely have cost him his job. Same’s true of Lehman’s and Bear Stearn’s CEO’s.
Think of it this way: How could all these firms and all these leaders be bad? Sure, you can imagine a few bad apples amongst any group. But all of them? No. The system itself incentivized bad behavior, and the principal architect of the system was Alan Greenspan’s Fed. Which means that we the people are actually to blame because we (through the politicians we elected) bought into the nonsense that Greenspan was some sort of economic maestro that could do no wrong.
April 19th, 2010 at 11:26 am
Fair point, Curmudgeon. I think I agree with you. You either play under the rules we’re given (and make your millions while you can), or you have a conscience and you sit home jobless and broke. Pretty stark choice.
April 19th, 2010 at 11:37 am
Yes, Manny. As Mark Twain once said, “Be good, and you’ll be lonesome.”
April 19th, 2010 at 11:38 am
Beg to differ, Curmudgeon.
I don’t find persuasive the argument that “everyoned did it, and failed, so all these firms and all these leaders can’t be bad.” That all these leaders were apparently lemmings is small consolation.
Unlike Bear Stearns, for example, that had economist David Malpass sounding an all-clear on the economy in January 2008, Rosenberg was warning that the party was about to end — we can probably agree that no one could time the end with much precision.
Merrill also had employees, like Kronthal, who wanted to pull back. Instead of getting heard, they got axed.
Merrill had the economic research and the savvy of some of its best traders/risk managers — and ignored it all. Damn the torpedos, full steam ahead!
April 19th, 2010 at 11:43 am
The Curmudgeon Says:
“But the point is that the players didn’t build the field upon which they played. The Fed, and to some extent, the federal government, did. And everyone was happy with it, until they weren’t.”
Didn’t these banksters deliver millions of dollars via lobbying and campaign contributions to exactly get that “playing field”? The players as you call them didn’t build the field. They just paid politicians to have it build.
April 19th, 2010 at 11:52 am
Excellent point by you as well, Robespierre. One can definitely argue that the bankers got the system they WANTED so they could then make their hundreds of millions over the short term before the house of cards came crumbling down.
April 19th, 2010 at 11:58 am
The better question is why more than one publication is letting William Cohan do these puff pieces. He’s written a few love notes to Wall Street in the NYT recently.
April 19th, 2010 at 12:00 pm
@Robespierre–indeed the industry helped design the field upon which it played. It’s the same principle behind “regulatory capture”. But we the people acquiesced in its design and construction, bowing to the Great Greenspan as some sort of economic savant that could, through monetary wizardry, save us. We built the field, or at least oversaw its construction, and loved the free money just as much as did the investment banks, until we finally realized that nothing is free.
@Invictus–I don’t dispute there were some bad risk managers in leadership positions. In fact, I think Merrill and Bear and Lehman collectively had some of the worst. Goldman probably had some of the best. But even Goldman got burned, and had to be rescued, and is now taking its share of villification for its unique method of managing risk.
April 19th, 2010 at 12:07 pm
Jim Cramer on Stan O’Neal:
Beware Bears’ Negative Subprime Spin
By Jim Cramer
RealMoney.com Columnist
6/27/2007 9:24 AM EDT
URL: http://www.thestreet.com/p/rmoney/jimcramerblog/10365099.html
Subprime liars everywhere! Stan O’Neal at Merrill (MER) claims it is contained. What does he know?!? What kind of fools does he take us for?!? Or how about Bear (BSC) putting in Tommy Marano to run the broken High-Grade Structured Credit Strategies Fund. That’s a sign of desperation. The mortgage sky is indeed falling! There’s so much grist every day for the bears’ mill, it’s almost comical that they’ve tried to turn these two news items into twisted negatives that tell you how desperate everyone is. (The Wall Street Journal loves this story, finding new subprime holes in London. Wait until you read how bad it is in Kuala Lumpur!) … Now, how about this Merrill statement? Have any of the bears who are so quick to turn this man’s words into posturing done any serious work on the tenure of O’Neal? This guy never speaks, and when he does, he means it. It would be so easy for him to dodge the question of subprime or to simply say nothing. But he spoke up. Was it wrong and Pollyanna-ish of the man? How about being right and correct? Why can’t we ever respect these people enough to think they are telling the truth? Maybe I worked for and with these kinds of folks too long, but I always found that when it comes to the markets they dominate, they never make pronouncements that come back to haunt them. They are too cautious and too public for that.”
April 19th, 2010 at 12:28 pm
None of these people deserve more than retribution, regardless of playing fields, rules, self-interest, and all the other concoctions that attempt to mitigate their behavior:
geithner,orszag,bernanke,summers,paulson,greenspan,rubin,friedman,fuld,frank,thain,dodd,mozillo,
o’neal, gensler, cassano, blankfein, shapiro,yellin, fink,kashkari, dudley dugan,bush,clinton, and now, J. Paulson.
The reason being that they don’t DO shit. All they do is maneuver numbers, fry up various rotten meat,
to serve to the unsuspecting, contributing nothing to the advance of civilization, retard it in fact, and have merely ‘succeeded’ in using their supposedly great brains to the deriment of everyone but themselves and their minions, partners, and other monsters without adding one single cent to the total pie.
Their power must be depleted at all costs. Or they be executed. Or bring down the whole system and start over.
April 19th, 2010 at 12:30 pm
O’Neal, Rubin and Greenspan have all said they did not understand “the complexity” of CDOs which either means they are lying or lazy. It is a product that takes away the risk of holding a single mortgage, by diversifying across many mortgages from different servicers, geographical areas, and quality. It is not rocket science, despite their protestations.
BUT, and a big but is, if someone is misrepresenting the quality – hence the real diversification, and the people putting them together, the people rating them, and the folks selling them are selling a sham.
It is almost impossible for a buyer of such product, especially if overseas, to do the due diligence to check on the actual mortgages and the properties. That is BS.
April 19th, 2010 at 12:42 pm
This has actually been my premise all along. Much of this were willful, fraudulent, criminal acts. The incentive to do this for short-term gain was just too great and continues to be so.
http://www.nytimes.com/2010/04/19/opinion/19krugman.html
April 19th, 2010 at 12:49 pm
“A few things became clear,” he says. “One is the complexity of it was far beyond what I would have imagined.”
At best, isn’t O’Neal admitting to not doing his job? As CEO how can he perform his function if he does not understand his business?
The lone remaining big partnership on Wall Street — Brown Brothers Harriman — seems to have side stepped this whole fiasco. Is it because the partnership structure made the BBH managers personally responsible financially?
April 19th, 2010 at 1:01 pm
Let us not ignore a prominent reason/excuse O’Neal et al has/will peddle…
They were all racing to hire the geniuses who could created the greatest, most complicated, ‘roided up CDOs possible. You know, the MIT, ETC who could have been using their talents to contribute more to society for much less money.
Once they did, the geniuses became the gatekeeper. Anyone who described the FrannieFreddiesteins as “complicated” was expendable, especially the ones who described them as complicated AND dangerous. Unless that person was the CEO who was now exonerated by the sheer complexity that “was far beyond what they would have imagined.” The CEO who HAD to hire the geniuses to keep up with competitors who were building their own uber-geek stables.
And the complexity didn’t end with CDOs. Just look at First Franklin… “the nation’s leading originators of non-prime residential mortgage loans.” They thought the mortgage loans were NON-prime, not SUB-prime.
April 19th, 2010 at 1:01 pm
Can somebody draw up a little caricature of what all these guys would look like behind bars?
April 19th, 2010 at 1:06 pm
@bigring
Which is why we have independent rating agencies… Oh… Hey, with the biggest cluster-F* in living memory there’s plenty of blame to go around. But the “act of God”/”perfect storm/”complexity beyond human understanding” excuses ring awfully hollow in a event that was entirely human synthesized. The only storm makers here were people. And, lots of people should be pilloried at the very least.
April 19th, 2010 at 1:17 pm
“Is it because the partnership structure made the BBH managers personally responsible financially?”
Good point, and I would agree that once the investment banks went public, they lost a great deal of acumen in risk-management. It’s far easier to play fast and loose and rationalize what you’re doing when it’s w/ OPM.
April 19th, 2010 at 1:24 pm
Contrast this quote: “One is the complexity of it was far beyond what I would have imagined.”
With the Caveat Emptor excusemaking for GS when they sold Abacus.
How can both things be relevant/true. Either they are all well qualified investors, in which case I don’t want to hear whoocoodanode from any of them, or these things were hopelessly opaque and defective products. You can’t have it both ways on these things.
April 19th, 2010 at 1:35 pm
The Curmudgeon Says:
“I would agree that once the investment banks went public, they lost a great deal of acumen in risk-management”
They didn’t lose any acumen in risk-management. Unless you have worked in sales it is very hard to understand. The reality is that sales people (and this is what they are) are under the gun week in week out (what have you done for me lately). The risk-analysis people are probably know internally as the “sales avoidance team” and in a public company where the principals make their money on the short term and they never risk their own money there will always be a tendency to ignore the risk-analysis. After all, the mentality is by the time this hits the fan I will be long gone and rich.
April 19th, 2010 at 1:40 pm
There was nothing wrong with the sausagemaker – combining many different mortgages to diversify away risk. The problem was they stopped putting any good pork in the grinder. When they took the first slice off the top – that is the real AAA product and tried to sell it to insurance companies in 2007, those companies smelt the sausage and said no.
April 19th, 2010 at 1:52 pm
O”neal is either A) a liar, or b)someone who thought he understood what he was signing off on, understood a little, but was not made to understand the entire thing.
I’ll choose B. It’s often times very easy to think you fully understand something. You can’t see very far ahead of an oncoming freight train and now how long or how fast it’s coming. You don’t usually know those things until it’s right upon you or running over you. By then, too late. You’re already dead.
Ask Bear. Ask Lehman. Ask millions of households who speculated that home prices could never do anything but rise.
April 19th, 2010 at 1:53 pm
I believe you are correct in assuming that there were individuals that complained to Raines about the CDO problems at Merrill or that stood pat that Merrill had no business acquiring First Franklin from National City…..and probably as you say Raines either fired them or made it so difficult for them that they had to find other jobs.
My question is why doesn’t the media find these people and do stories on them? They shouldn’t be hard to find once the problems have been exposed. REAL, in depth stories on those that stood up for morality and for abidance by the law. There should be amazing stories of sacrifice here going all the way back to ENRON and Worldcom. Yes the media tried to make a star out of Sharon Watkins at Enron, but truth be told, she was late to the game to complain. There had to be others who complained at far earlier stages in all of these companies and were forced out by greedy and immoral management.
If these individuals stories were told, it would give Americans a far better picture of corporate America.
April 19th, 2010 at 2:17 pm
@Robespierre: Agreed. Risk analysis is far different for a company pushing to beat the quarterly numbers–shareholders demand results, and immediately–and a company that is risking its own capital (i.e., not the shareholders’) and doesn’t have to beat the street. That’s what I meant by “acumen”, although it’s just a charitable way of saying they threw proper risk management out the window when they went public.
April 19th, 2010 at 3:26 pm
@Brett
Absolutely right. Why isn’t media doing the investigative work required to expose these frauds and keep on doing it till the justice department don’t-make-me-laugh gets their ass in gear and starts indictments?
Useless question. Media is in collusion with the thieves.
April 19th, 2010 at 4:39 pm
Please stay on message in this stream! The focal point here is that Stan O’Neil is a lying, self justifying, pay me first, SOB who ruined ten’s of thousands of lives on Wall Street while he got filthy rich.
Maybe some of you can either improve on the insults for this scumbag or give examples of what he did.
The retail FA compensation system at Merrill puts a percentage of gross into a ten year deferred comp program invested in Merrill stock. FA’s are not allowed to sell and they lose the shares if they leave. Merrill also had an employee ESOP in the early 90′s which created vaste amounts of wealth for employees in Merrill stock. By wiping out 80% or more of both of these programs, Stan O’Neil wiped out a big piece of wealth and retirement savings for thousands of Merrill FA’s.
A cynical look at Stan getting the boot in the fall of 2007 is that he saw the damage Mortgages would do to Merrill and he arranged to get pushed out. This terminatiion while not labelled a dismissal was enough to vest Stan in the $160 million he sold on the way out the door. If he had stayed he would have shared the pain and lost $130 million. Conspiracy theory: Stan O’neil benifited by being asked to leave in 2007 and had incentive to arrange the exit.
April 19th, 2010 at 5:31 pm
Don’t even think that Stan O’neal did not understand the CMO / CDO business and how much risk it created for Merrill Lynch. Look at his background: http://en.wikipedia.org/wiki/Stanley_O'Neal
Stan received a MBA from Harvard, was a Director in Treasury at General Motors, and then worked in all the positions at Merrill that would teach him how to understand the CMO’s. Stan was the head of the leveraged finance dept., global head of capital markets, and then co-head of institutional client group. He was CFO from 1998 to 2000 so he knew exactly how to evaluate the risk to Merrill from exposure to mortgages. Then he was the CEO who expanded the mortgage business with the First Franklin aquisition.
I don’t think anyone should believe that Stan did not know or could not understand if he asked for a briefing. In case you did not notice, he is black! He did not get to be head of capital markets, CFO, CEO , Chairman without being twice as smart and five times as ruthless as the next guy in the room.
April 19th, 2010 at 10:02 pm
All of this behaviour can only be explained both by the huge egos they all are and, more importantly in this context, feelings of guilt. Without the latter, why not just melt into obscurity and enjoy the millions?
April 20th, 2010 at 1:47 am
If these individuals stories were told, it would give Americans a far better picture of corporate America.
And that’s why the corporate-owned media so rarely does these stories.
April 20th, 2010 at 10:59 am
I watched the internal broadcasts of the destruction of Merrill during this time and heard Stan O’Neal’s briefings. There are several good comments above, but the fact remains that Stan O’Neal was at the helm of this company during the destruction. O’Neal was the leader when the company took the CDOs that had stopped selling and placed them on the company balance sheet. He either authorized using company funds to buy the billions of CDOs and placed the company at risk, or he didn’t know others at ML were doing it, which means he had no ability to be a CEO anywhere. Brokers at the firm were limiting client exposure to mortgages, house building firms and anything related to this area of the economy. We read Rosenberg’s reports and paid attention, but O’Neal didn’t see it? Don’t be stupid.
No matter how you look at Merrill, no matter who you point to for blame for the housing bubble, no matter how you “SPIN” this story, NOTHING can trump the fact that Stan O’Neal was at the helm of this company and he authorized the increase in balance sheet risk, which ultimately ended Merrill. The destruction of Merrill begins with this one act. The only question remaining is if O’Neal will ever be prosecuted.