'Retirement' of Merrill Chief Causes Jitters on Wall Street

Merrill Lynch parted company yesterday with its chief executive, Stan O'Neal, leaving the investment bank's leadership in a state of limbo and prompting unease on Wall Street.

After days of speculation, Merrill announced that Mr O'Neal, 56, had decided to retire with immediate effect after agreeing with the board that a change in leadership would "best enable Merrill Lynch to move forward".

Mr O'Neal lost the confidence of Merrill's board after the bank ran up liabilities of $7.9bn (£4bn) in the recent global credit crunch, prompting the worst quarterly loss in its 93-year history. He was criticized for failing initially to reveal the extent of the problem and for making a behind-the-scenes merger approach to a rival bank, Wachovia. Some analysts anticipate a further $5bn write down from Merrill.

The outgoing chief executive has hired a top New York remuneration lawyer to negotiate his severance terms and he is expected to leave with $160m in shares and options built up over his four-year tenure. "The company has provided me with opportunities that I never could have imagined growing up, culminating with my leadership of the company over the past five years," said Mr O'Neal, who grew up in a rural Alabama community and became the first black chief executive of a Wall Street bank.

The bank's shares slid by nearly 4% on uncertainty about its future leadership. Merrill is yet to appoint a successor to Mr O'Neal, instead installing a temporary management structure which sparked speculation of an internal power struggle. An Italian private equity magnate, Alberto Cribiore, is to stand in as interim non-executive chairman and will head a search committee to find a new chief executive. Merrill's day-to-day operations will be handled by its two chief operating officers, Ahmass Fakahany and Gregory Fleming.

But in a reshuffling of duties, Mr Fakahany has been stripped of his responsibility for managing risk - the issue on which Merrill tripped up - and will be restricted to back-office administrative functions.

Michael Mayo, a banking analyst at Deutsche Bank in New York, said in a research note: "Power-sharing mostly only works during good times."

He criticized Merrill's executive pay policy: "There needs to be a better link between shareholders and the incentives of management. Past compensation of top management was inflated by higher risk whose losses were not realized until this year."

There was no mention in the new structure of Merrill's head of wealth management, Bob McCann, who is popular among brokers and has been tipped as a possible candidate for the top job. Adding to a sense of uncertainty, the television channel CNBC reported that Merrill's chief financial officer, Jeffrey Edwards, had offered to resign but was turned down.

The leading external candidates to run the bank include Larry Fink, head of the $1.3 trillion investment management firm Blackrock, which is 49% owned by Merrill. The New York Stock Exchange head, John Thain, has been mentioned, although sources close to him have played down his interest.

Mr O'Neal is the biggest Wall Street casualty to date from the sub-prime mortgage crisis, which was sparked by defaults on home loans that were offered to less affluent Americans, a problem which developed into a global meltdown in the credit markets.

Industry experts credited Mr O'Neal with success in reshaping Merrill Lynch into a leaner entity, partly through thousands of job losses between 2001 and 2003. The stockbroker Punk Ziegel said the annual cost of running the bank had dropped from $21bn to $14.9bn.

But critics have accused him of tolerating little discussion and of operating a harsh management style, which proved to be damaging to Merrill's culture.

Winthrop Smith Jr, the son of one of Merrill's founders, said: "Every firm is going to make mistakes, every firm is going to have difficulties. If you haven't built up a culture that's behind you, that is, in the long run, going to trip you up."

Bill Andrews, an analyst at the money management firm CS McKee, a Merrill shareholder, said Mr O'Neal had accomplished much at the company, pushing it into new businesses and expanding its presence overseas. Before the third-quarter meltdown, profit at Merrill had quintupled under his leadership.

"I don't think his tenure was an abject failure. But Stan doesn't like a lot of debate. People who don't agree with him, no matter how talented they are, weren't around long. That's his Achilles heel."