Monday, January 21, 2008

Merrill Lynch - Stan Oneal- Strategy

Stan Oneal took the reins of Merrill in 2002 and began to dismantle the "Mother Merrill" culture, which accepted lower profit margins in place of risk.

Mr O’Neal said in 2002: "The Mother Merrill, cradle-to-grave thing isn’t possible to do. It’s not even smart to do."

Mr O’Neal set about cutting costs through mass redundancies at the same time as stepping up the group’s exposure to higher-margin areas such as loans and equity for leveraged buyouts, commodities and risky "sub-prime" mortgages.

Mr O’Neal’s move away from Merrill’s core stock underwriting and money management business into a higher octane group investing more of its own money initially paid significant dividends. The bank’s profits quickly more than doubled to average at more than $5 billion annually between 2003 and 2006 and the share price soared.

In 2006, Merrill made a $7 billion profit (investing from its own balance sheet), compared with $2.2 billion in 2002. But the group became increasingly ambitious, hiking up investment in so-called collatorised debt obligations, or pools of bonds largely backed by sub-prime mortgages, from about $1 billion 18 months ago to more than $40 billion.

Those investments were largely responsible for an $8.4 billion writedown and more.

Merrill Lynch has today reported a $8.6bn net loss from continuing operations for 2007. In its full year results for the 12 months to December 31, the bank also revealed net revenues of $11.3bn - a drop of 67% from $33.8bn in 2006.

According to Adam Compton, an analyst at RCM Investors, "A lot of the damage at Merrill stems from the attempt to change a culture that was inherently against risk – which blew up in its face."

Thain the new CEO said recently "We will continue to take risks -- you don't make money if you don't take risk, But the risk will be sized appropriate for the business. Nobody should be taking risks that wipe out the entire annual earnings of a business, and certainly not the entire firm."

That's exactly what happened under former CEO Stan O'Neal, whose heavy bets in subprime mortgage securities backfired as homeowners defaulted on their loans at an alarming rate. That strategy led to a nearly $10 billion loss during the fourth quarter, on top of $2.31 billion during the previous period.

Merrill Lynch posted a net loss after preferred dividends of $9.91 billion, or $12.01 per share, compared to a profit of $2.3 billion, or $2.41 per share, a year earlier. It also recorded negative revenue of $8.19 billion, down from revenue of $8.39 billion a year earlier.

The New York-based brokerage marked down $11.5 billion from mortgage-backed securities, and an additional $3.1 billion in adjustments to hedge positions on them.

Exposure to risky collateralized debt obligations, or CDOs, was $4.8 billion at the end of 2007, down from $15.8 billion three months earlier. For the same periods, exposure to subprime-residential mortgages fell to $2.71 billion from $5.66 billion.

Times Online October 30, 2007

Stan O'Neal: biography and strategy
Times Online October 30, 2007 18 Jan 2008

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