Merrill Lynch & Co. Inc.’s board needs to get over Stan O’Neal in a hurry. The departing boss may have finally lost the confidence of the investment bank’s directors with his blundering approach to Wachovia Corp. about a merger.
But far more troubling than this slip of protocol is Merrill’s lingering exposure to subprime and structured credit relative to its capital base. Directors may be tempted to follow Merrill tradition and promote from within. But an outsider with strong fixed-income skills would be the best fit to calm the frayed nerves of investors worried about Merrill’s financial footing.
Merrill finances itself through capital markets. So any solvency concerns raise its cost of doing business. This weakens its competitive position against other Wall Street firms employing wholesale funding, and universal banks such as JPMorgan Chase & Co., which collect deposits and can borrow from central banks. Merrill’s revelation that losses from O’Neal’s headlong plunge into subprime mortgages and collateralized debt obligations (CDOs) would be $8 billion (Rs31,680 crore) instead of $5 billion dramatically weakened the firm’s perceived financial strength. In addition, Standard & Poor’s and Moody’s Investors Service cut Merrill’s credit rating and kept it on negative watch for possible further downgrade.
Although Merrill reduced its holdings of CDOs, chock-full of asset-backed securities, it still had some $15 billion of these at quarter end. For a firm with $39 billion of stockholders’ equity this is no small matter. Merrill’s board must move quickly to show the firm has a handle on its exposure to this market—something the third quarter earnings fiasco showed the firm did not. Plucking a new boss from the current management bench may not be enough to becalm these concerns. Bringing in an experienced fixed-income hand, such as BlackRock Inc.’s Larry Fink or Barclays Capital’s Bob Diamond, would be the better option.