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Street Justice

Merrill Lynch’s Stan O’Neal and Citigroup’s Chuck Prince racked up billions in losses—and got exactly what they deserved.

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Illustration by Christopher Sleboda  

Eureka! We have finally found the level of loss that sends the boss packing in corporate America: $8 billion. If a company’s losses in a given quarter exceed that amount, as they just did at Merrill Lynch and Citigroup, the CEO is actually out of a job! Of course, even with that torrent of red ink, you can’t get away from euphemisms. Merrill called its execution of CEO Stan O’Neal a retirement and carefully pointed out that the $160 million O’Neal got to take with him wasn’t severance, but just what the firm was contractually obligated to pay him. There was no mention that perhaps, if you lose $8 billion, you can be fired for cause and be denied the contracted pay package. If $8 billion in losses isn’t cause, what is? But it seems that no company will fire a CEO and then say “sue us for the rest of your salary,” no matter how deserving the firing might be, and this was the most compelling case for a firing that I’ve ever come across that didn’t involve outright embezzlement.

Citigroup was ridiculously gracious with Charles Prince as well, even though the losses under his régime could wind up exceeding O’Neal’s by as much as $3 billion. The world’s largest bank gave Prince the absurd courtesy of a resignation, with the company’s new chairman, Bob Rubin, the former Treasury secretary and former Goldman Sachs co-chairman, going out of his way to say that the decision was Prince’s alone and not the bank’s. The resignation came a day ahead of an emergency meeting in which the Citigroup board was expected to weigh Prince’s fate. Pure coincidence, no doubt.

If you are wondering whether these CEOs were brought down by the mistakes of their underlings or wholly unavoidable situations not of their own making, don’t even go there. These men charted and executed the exact paths that generated such colossal losses for their firms, embracing bonds backed up by residential mortgages as though they were gold. The red ink is on their fumbling hands, and it’s indelible. Indeed, the biggest surprise may be that it took so long to get them out, although the lasting damage inflicted on their organizations by the extended service of these two CEOs may prove to be at least as shocking.

Stan O’Neal, who always seemed to belong to the Joseph Stalin school of management, has spent most of his tenure firing fantastic people who challenged him, especially those like Jeff Kronthal, who directly questioned his decision to plunge into the cesspool of residential mortgages at the worst possible time, just when the housing bubble burst. O’Neal’s decision, at the exact top of the housing cycle, to buy First Franklin, one of the worst subprime-mortgage lenders, might go down with New Coke as one of the biggest corporate blunders in history. Merrill Lynch then underwrote and packaged some of the most worthless mortgages around, only to get stuck holding the absolute worst of them when no one else would buy them. When the losses from these mortgages began to cascade, O’Neal first tried to explain that only $3 billion had been flushed down the drain. Then a few weeks later, without an ounce of explanation, he announced that the loss was really $8 billion! In reality, nobody has any idea how much money has been lost, because the defaults on the bonds backed by mortgages get worse by the week. Then, on top of the losses, O’Neal tried to cover up the whole shebang by attempting to arrange a shotgun marriage with Wachovia Corp. without first checking with the board of directors. Merrill’s culture is so proud that it’s entirely possible the Wachovia double cross was more to blame for O’Neal’s exit than the massive mortgage losses. Merrill Lynch people worship Mother Merrill. O’Neal didn’t get it: He didn’t own Merrill; he just worked there.

How much was O’Neal hated before his departure? This man was Wall Street’s Wicked Witch, a much-feared, totally unrespected hatchet man who appeared to be beloved by the troops but in reality didn’t have a friend in the joint. In truth, the rank and file, many executives, and the powerful alumni (Merrill’s a bit like a college-football powerhouse—the alumni actually matter) loathed O’Neal. I swear you could hear the cheering coming from downtown when he left. In the 24 hours after the losses were announced, a half-dozen active and recently fired Merrill execs sent me the URL for a golf site, ghin.com, where golfers enter their games and scores. Sure enough, O’Neal had posted twenty scores in the past few months, as the firm bled losses from the eyeballs. A week has gone by, and I’m still looking for an exec who will defend O’Neal’s behavior, on or off the record. I can’t find one.


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