Business Insight Zone

Last week I made a meal (more than once) out of Citigroup’s weak third-quarter results, which led me to question whether state openly that Citi would be better off with someone besides Chuck Prince at the helm. Then Merrill Lynch surprised everybody with third-quarter results that strained the vocabulary. When a big investment bank writes down $8 billion in bad debt in a single quarter, is that “horrific”? “Abysmal”? Perhaps “a Faustian nightmare”? Among the most surprised by Merrill’s humiliating results were those who had taken at face value the firm’s early-October estimates of its exposure to credit problems. Those estimates were off by only . . . well, the odd few billion.

And now the other shoe is dropping — directly onto Merrill CEO Stan O’Neal:

O’Neal Ouster Makes Mess of Maternal Merrill Lynch

…Merrill’s result, coming during a credit market shakeout that triggered a run on a British bank and caused Switzerland’s largest financial institution to fire its CEO, was the biggest quarterly debacle in the history of the securities industry. That was enough for the 11-person board, nine of whom were handpicked by O’Neal during his five years as CEO, to make it clear the 56-year-old grandson of a former slave is leaving, possibly as early as today…

(Emphasis added.)

There are two good reasons to get rid of CEOs:

1. Because of what they did.
2. Because of what they can be expected to do.

When I was railing last week on Chuck Prince of Citigroup, my main complaint wasn’t about what he’s done — which has been tepid enough, but hardly cataclysmic. No, my complaint is about what a reasonable person (or better, board of directors) can expect him to do going forward, i.e. not much. Once in a very long while the bench warmer becomes a Hall-of-Famer. Once in a very long while an obscure Midwestern congressman becomes a great President. But mostly, no, it doesn’t happen.

O’Neal, by contrast, is being cashiered for what he did. To some degree, he’s being punished for years’ worth of undermining the “Mother Merrill” culture. As the Bloomberg story above points out, O’Neal argued for the importance of merit and performance over long tenure or personal relationships. Well, now that standard has come back to bite him. The worst thing an investment banker can do is to lose money, and the very worst thing he can do is preside over the worst loss in his firm’s 93 years of operation. So now he pays the price.

Stan O’Neal is very rich, very smart, and in possession of a very strong ego, so I’ll shed no tears for him. But I’ll continue to wonder which of his banking brethren will exit next.