O'Neal's ouster puts CEOs on notice

O'Neal's ouster puts CEOs on notice

	Published : Wed, 31 Oct 2007 21:32 By : Agencies Print this Story

NEW YORK (AP) - The downfall of Stan O'Neal from Merrill Lynch & Co. has put the leaders of Wall Street's biggest banks on notice -- especially as massive write-downs from the summer's credit turmoil continue to lurk.

O'Neal became the first chief executive to be shown the door after leading the world's largest brokerage to a $2.24 billion third-quarter loss -- and he is unlikely to be the last. His ouster sets a precedent for disgruntled investors and board members, and it places bankers like Citigroup Inc.'s Chuck Prince and Bear Stearns Cos.' James Cayne under greater scrutiny.

Write-downs across Wall Street have wiped some $25 billion from the income statements of investment banks, and investors have been lulled that better times are ahead. But analysts in recent days have begun to speculate more pain is left -- and that Merrill Lynch might have to write-off another $4 billion after a $7.9 billion third-quarter charge.

'The biggest business problem right now is future write-downs, and the actual survival of some of these firms might turn on how they deal with it,' said James Post, a professor at the Boston University School of Management who specializes in corporate ethics. 'This is problem No. 1 for the CEOs.'

O'Neal and others rushed into the fixed-income markets during the past few years to take advantage of unprecedented growth in securities linked to subprime mortgages and other assets. They booked big returns until the summer, when rising mortgage delinquencies caused securities such as collateralized-debt obligations to plunge in value.

Whoever leads Wall Street's biggest banks and brokerages faces the challenge of risk management and pulling them out of turbulent fixed-income markets. And, if more losses are expected at Merrill Lynch, than they will be at competing firms.

Until now, investors have been satisfied with CEOs ousting department chiefs that were in charge of running fixed-income operations.

Bear Stearns Chairman and CEO Cayne let go of Warren Spector, who ran two hedge funds that imploded due to subprime losses. At Citigroup, investment banking head Thomas Maheras was cut. And, O'Neal tried to appease investors by letting go of fixed-income head Osman Semerci before he himself was let go.

Ken Lewis, CEO of Bank of America Corp., also swung the ax. He slashed 3,000 investment banking jobs, cut a number of top executives, and stopped offering home mortgages through brokers.

The bloodletting showed boards that top management was taking control of the situation. And, even warnings about write-downs brought some relief to investors worried about worst-case scenarios -- at least temporarily.

O'Neal stated on Oct. 5 that write-downs would come in at $4.5 billion, significantly below what it actually reported. He got it wrong, and investors spoke clearly: Merrill's battered stock rose nearly 9 percent on speculation his days were numbered.

Other CEOs can't afford to make the same mistake.

'Any way you look at it, the surprise component of the earnings is what sealed his fate,' said Jeff Harte, an analyst with Sandler O'Neill. 'These guys are in the business of taking risks, and unfortunately it is a double-edged sword. The question is do we really know what their exposures are, and that's what really scares people.'

It also doesn't help if CEOs already have been under pressure for other issues, such as Citi's Prince and Bear's Cayne. Both men have been the subject of near-constant speculation their jobs are on the line.

But, there's a few names on Wall Street that seem to be safe: Lloyd Blankfein and Richard Fuld. Blankfein, head of Goldman Sachs Group Inc., delivered year-over-year gains during a third quarter in which everyone else had problems. Lehman Brothers Holdings Inc.'s Fuld also fared well during the quarter, and has enjoyed staunch support from the investment bank's ranks.

'You have seen the industry go through these kind of cycles,' said Steve Golub, vice chairman of investment bank Lazard Ltd. 'I think the industry will work itself out, who knows how long it will take -- but it certainly is not happening tomorrow.'