Merrill reps upbeat about post-O’Neal era

Brokers at Merrill Lynch & Co. Inc. of New York are upbeat about the prospects for their company following the departure of chief executive E. Stanley O’Neal last week.

“I think we’re all happy,” said a Merrill representative on the East Coast, who asked not to be identified.

“By and large, most of us are saying, ‘Great, let’s move on,’” said a Merrill broker in California, who also asked not to be identified. 

The broker said: “Mr. O’Neal was incompetent. He milked the firm. A lot of us feel that way.”

In fact, many Merrill advisers are surprised by outsiders’ expectations of their reactions.

“What I find interesting is that this week, I got calls from three headhunters,” the California rep said. Rumors that Merrill reps want to leave seem to be “all over the Street,” but that’s not the case, he said.

To be sure, the news is bad. The firm announced $8.4 billion in write-offs on mortgage-backed bonds and bad loans for the third quarter, and the Securities and Exchange Commission is reportedly looking into the matter. At press time last week, with the stock price down about 40% for the year, reps are feeling it in the pocketbook.

“I lost $120,000 in the last 90 days” as a result of the falling share price, said a Merrill rep in the Southeast, who asked not to be identified.

He, like many established Merrill brokers, owns hundreds of thousands of dollars of phantom Merrill stock in his deferred-pay plan.

But most aren’t overly concerned. They say the firm remains profitable, and its A-plus credit rating still stands above those of most major banks.

Merrill brokers also have been e-mailing clients, updating them on the news and ensuring them that their accounts and the retail business remain unaffected.

Merrill is “a big organization that works exceptionally well on its own,” said the Southeast rep.

Brokerage firms “shoot themselves in the foot with regularity,” said the East Coast rep. “But what happens is, you then get refocused. Everyone [at the firm] sees they’re all in the soup together,” and cooperation improves.

Merrill’s sales force has little sympathy for Mr. O’Neal, who left last week after the firm reported the huge unexpected losses. Mr. O’Neal had no background in retail and was viewed by Merrill brokers as a tough cost-cutter. That’s why the losses were surprising.

“Eight billion dollars? That’s amazing. What were they thinking?” said a Merrill broker on the West Coast, who asked not to be identified.

“I think [Mr. O’Neal] got rid of too many people who had a little gray hair, and took in a new group who lost sight of history,” the broker said. ”Greed overtook good judgment.”

The “culture of fear” that Mr. O’Neal created kept subordinates from reporting bad news and ultimately caused his downfall, the Southwest rep said.

“If you raised your hand [and told management about a problem], you’d get fired,” said the East Coast rep.

Brokers were also shocked that Mr. O’Neal reportedly made an overture to Wachovia Corp. of Charlotte, N.C., about a possible merger.

“That looks crazy,” said the West Coast rep.

“Nobody here wants to work for a bank,” said the Southeast broker. “It would go over horribly, [like the merger with] Advest [Group Inc. of Hartford, Conn.] where three-quarters of the guys left.”

The California rep said the reported Wachovia feeler sounded like a “sweetheart deal” for Mr. O’Neal.

“It tells you everything. We knew this all the time, that [Mr. O’Neal] was out for himself,” the rep said.

Mr. O’Neal made some tough cost-cutting decisions when he took charge of the firm in December 2002, brokers say. 

“But the guy who makes tough [cost-cutting] decisions generally can’t be the person who leads you to a new level” of success, said the Southeast rep.

Because Merrill classified Mr. O’Neal’s departure as a retirement rather than a dismissal for cause, the executive’s deferred stock and other compensation, reportedly worth a total of $161.5 million, vest.

Brokers noted that if something similar happened to a retail rep — a major gaffe followed by an exit — the departure would not be labeled a retirement.

“For anyone else at the firm, if you’re allowed to resign or you leave, you lose your deferred comp,” which must be invested in Merrill tracking stock, the Southwest rep said.

“Where was the board?” asked the California rep. “They should have canceled some [of Mr. O’Neal’s] past compensation and options. I would be thrilled to see a lawsuit against the directors.”

Brokers at the firm want a new chief who will support Merrill’s retail operation for the long term.

They fault Mr. O’Neal for being unable to see beyond the immediate bottom line and, like many brokerage chiefs, being seduced by the seemingly easy money to be made when capital markets businesses are hot.

“I really think you need a guy who’s been a broker in that top spot, because retail is the premise of everything [Merrill does],” said the Southeast rep.

A chief executive “has got to know what the guys who sit behind my desk need. When they lose sight of that, the whole house of cards comes down,” the rep said.

Robert McCann, Merrill’s head of retail, is one executive reportedly in contention for the top spot. Many Merrill reps are rooting for him, although others would like to see an outsider come in.

Mr. McCann “is a straight shooter, knows the business, and I think most people like him,” said the East Coast Merrill rep, who nevertheless would like to see the board hire from the outside.

“We need a general housecleaning,” said the California rep, adding that the upcoming changes are “going to be a very positive move for the firm.”

Dan Jamieson can be reached at [email protected].