Teri Buhl

What was really behind O’Neal’s billion dollar write-downs at Merrill Lynch

By Teri Buhl

Today, Fortune’s William Cohan gets  former CEO Stan O’Neal to spill about some internal quarrels he had with his board about selling Merrill Lynch, in a move that almost make it look like he wasn’t the only fall guy to screw Merrill shareholders.

O’Neal, who was ousted in October 2007 after mega billion dollars CDO write-downs hit Merrill’s books, tellsFortune that he really did try hard to sell the troubled bank to Ken Lewis while the stock price was still high and the world didn’t quite know about his $45 billion mortgage time bomb. He’d even started talks with Bank of America CEO Ken Lewis asking for $100 a share in September 2007 when the stock was trading below that, but influential board member Alberto Cribiore, a wall street dealmaker  he’d help get on the board, wouldn’t let him sell the bank. Why because he thought Lewis was ‘an asshole’. According to Fortune, O’Neal also said Cribiore thought they could work their way out of the looming CDO write-down problem and didn’t need to sell when they were weak. A year later Merrill sold to BofA for a heck of lot less than the number Stan had been aiming for and the $MER shareholders were left wondering if they’d been saved or royally screwed.

Cohen points out that O’Neal failed to influence his executives and board members during his reign and communicate the real seriousness of their problems in the bank’s mortgage related assets. The question still unanswered is did he really know what those problems where and why not?

Cohen writes: “When O’Neal got back to New York from Martha’s Vineyard in September 2007, he spoke to Cribiore about his growing concerns. “This is a serious and deep problem,” O’Neal says he told Cribiore. “Well, just take as big a write-off as you can imagine,” Cribiore told him. “The problem, Alberto, is I don’t know how deep the hole is,” O’Neal remembers explaining. “I can’t sit here and tell you that if I decide to take a $5 billion or $10 billion write-down, I can’t tell that that’s the right number. I can’t tell you if there’s $15 billion or $20 billion more, and the reason I can’t tell you that is because I don’t know how the market will evolve, and there is no market today for these securities. Whatever value we come up with is highly theoretical.” O’Neal felt uncomfortable telling Merrill’s employees and shareholders that a big write-off would solve the problem when he wasn’t sure it would.”

You see this wasn’t the only time O’Neal had been challenged by the banks executives. According to a senior member on Merrill’s CFO team who talked to this reporter on the condition of anonymity, Jeff Edwards, the bank’s CFO, had some serious issues with the number on the losses O’Neal was telling investors. In the beginning of October, Merrill shocked the street and announced they’d be taking a $5bn write down on mortgage assets. And then a few weeks later O’Neal came out and told The Street they reexamined their positions and that it’s actually going to be over 50% more that they need to write-down. Well according to the Merrill executive I spoke with, Edwards told O’Neal that he wasn’t marking these CDO assets right and the real loss to the firm would be much higher. The two got in a verbal confrontation, O’Neal didn’t want to announce more write-downs so soon and Edwards threatened to quit that week if O’Neal didn’t revise them. And that’s why we suddenly saw a very different number announced, which was for $7.9 billion on their CDO and subprime portfolio.  Ouch!

When the write-down adjustment was announced the New York Times wrote “The additional write-down, coming so soon after the company’s $5 billion charge, may raise more questions about the leadership of O’Neal, and the ability of his top executives to assess the firm’s risk exposure.”

But in reality it looks more and more like O’Neal knew the risk exposure he just couldn’t stand up and admit it. And even if he’d tried to stand up to his board it looks like Cribiore, the influential board leader, was too entrenched in his own agenda to do the right thing with it.

Fortune’s ‘Merrill Lynch’s $50 billion feud’: http://money.cnn.com/2010/04/15/news/companies/merrill_lynch.fortune/index.htm

Editors Note: Teri Buhl is an investigative news reporter who has written for Trader Monthly, New York Post, HousingWire, Dealbreaker, Greenwich Time, and  Fortune.com

A previous reported stated Nelson Chai was the CFO in Oct 2007 that was corrected to Mr. Edwards.