Congrats to Fortune, who got the first interview with former Merrill Lynch CEO Stan O'Neal. I reckoned he'd come public one of these days, but I am rather amazed by his description of how Merrill Lynch nearly blew up. He says he was surprised --- really surprised--- to find that ML that by April of '07 "they'd run[CDO exposure] to $45 billion. It didn't grow much from that point, but it was too late."
Notice the word “they’d.” (It’s another, Big Boy Did It excuse!)
O'Neal says that the CDO exposure "should have been more like $10 billion for us and probably was around $10 billion at the end of '06." (It wasn’t $10 billion. In fact, that is such a laugher; see below.) Basically, O'Neal argues that if only a key board member had listened to him and allowed O'Neal to sell Merrill to BoA in 2007 at a price of as much as $100 a share.
His assertion that he never meant for ML to get that deep into CDOs is directly contradicted by a guy I know who worked in the ML CDO department and was fired (along with his boss and a few others) about 15 months before Merrill's Sept. 2008 shotgun wedding to BoA. Their infraction? They weren't with the program; they told Stan O'Neal that ML needed to reduce its exposure to CDOs. For a while my friend was wondering if he had been correct. "I thought my career was over, that I had made a mistake," he told me some time ago. Turns out he was right; Stan was wrong.
Another person I know who worked at ML for decades and interacted with O'Neal when he was CEO said O'Neal's descriptions of events were "questionable" and the bit about the board member who wouldn't listen to O'Neal was an outright "lie." He further added that he always doubted O'Neal's character, but now was convinced O'Neal was a "scum bag."
A successful financial advisor at Merrill simply told me he didn’t believe a word of O’Neal’s in Fortune.
Chain of Blame, a book we excerpted in our December 2008 issue, also tells a completely different story than the one O'Neal peddled to Fortune (which should have talked to more people to dispute O'Neal's assertions; the story is written as if O'Neal was allowed to edit the story).
The authors of the book note that when O'Neal came in as CEO in 2002, ML had little exposure to the lucrative securitization of residential loans market. Paul Muolo and Mathew Padila , the book's authors, wrote:
"According to [Bill] Dallas [[First Franklin founder and CEO; founder of Ownit Mortgage Solution, part owned by Merrill] and others, O'Neal's message to Merrill's mortgage department was clear: Go after the subprime business. Be number one. By 2004 Merrill began to move up in the ABS league table rankings. It was in that year that Countrywide's capital markets group, Countrywide Securities Corporation, blew away the competition, securitizing $72 billion in subprime and nonprime loans. Mozilo, who at first had resisted the subprime business, was now the chairman and CEO of not only the largest prime lender, but the fastest growing subprime originator — plus the top securitizer of non-Fannie/Freddie loans.
"O'Neal grew anxious about the business. He felt he was missing the boat. 'Stan didn't want to get left behind,' said Mozilo. According to Bill Dallas, O'Neal shoved aside the senior manager in charge of the mortgage department, replacing him with Michael Blum, who carried the title of managing director in charge of global asset-based finance."
So intent was O'Neal on showing Wall Street that Mother Merrill was more than just a cabal of 15,000 retail stockbrokers that by "the time 2005 ended, Merrill was the seventh largest issuer of subprime ABSs in the United States out of a growing field that now included 25 securities underwriters. That year Merrill had bought and securitized $30 billion in subprime mortgages, and was just a few billion dollars behind its archrivals, Bear Stearns and Countrywide."