Abelson: Heads will roll at Merrill Lynch

What inspires these reflections, tinged as they are with awe, wonder and, of course, envy, is the gathering fuss over Merrill Lynch, precipitated by the fact that the giant brokerage firm-investment bank-whatever, wrote down something like $8 billion worth of CDOs (those pesky collateralized debt obligations that were all the rage when mortgage-securitizing madness reached fever pitch), a heap of subprime paper and dubious leveraged loans.

Even these days when astronomic numbers are the norm, $8 billion is not chopped liver and the disclosure dealt a heavy blow to Merrill's pride (incalculable) and its results (a $2.3 billion loss in the third quarter). What magnified the impact on its shares -- they fell to 61 and change from around 75 at start of the month -- was that a scant few weeks ago, the official word was that the write-down would be mere a $5 billion. Guess they ran out of fingers to count on; it happens, especially when you're totting shrinkages in values carried on your books.

Inevitably, the blame has fallen on Merrill's CEO, Stan O'Neal. Mr. O'Neal has been running the company for five years, and a lot of that time he seemed to be auditioning for the role of Mack the Knife. Any number of heads did roll during his regime, which didn't make him very popular, especially among the brass he cut loose.

However, as it emerges, his real problem was not managing people but rather managing risk. Mr. O'Neal was very aggressive at taking risk, but, alas, proved less than agile at recognizing it. Mesmerized by the vast returns he envisioned for risk, he never took the time to appreciate why it's so widely considered a four-letter word.

At this writing, anyway, Mr. O'Neal is still hanging in there. Whatever happens, we're happy to say, he won't need to pass the cup: He has been, remember, boss of a goliath Wall Street firm, so by definition, has been adequately -- one might even venture, lavishly -- compensated. Last year, he took home a tidy $48 million.

~ Alan Abelson, "Schizo Market," Barron's, October 29, 2007