So much for the board of US investment bank, Merrill Lynch, getting tough and making CEO, Stan O’Neal pay the full cost for poor management and plunging the bank into its biggest losses for years because of failed deals in subprime mortgages, credit derivatives and leveraged loans.

Those tough guys on the Merrill’s board allowed Stan to retire, thereby boosting his departure package by almost $US90 million – taking it to a huge $US160 million.

Turning failure into incredible wealth is just another example of how Wall Street’s big financial groups refuse to do what they insist others must do: take tough medicine, cut costs and get rid of underperforming assets or managements. It’s one rule for us, and another for you. Let’s see if Merrill’s investment analysts take a poke at the bank’s board, or if analysts, from say Citigroup, criticise Merrills. That might be a bit much for Citigroup, whose CEO Charles Prince is said to be next for the high jump.

The Merrills board said O’Neal and the board had “both agreed that a change of leadership would best enable Merrill Lynch to move forward”. O’Neal’s departure follows the company’s admission last week that it had lost almost $US8 billion on mortgage-backed securities. But instead of sacking him and forcing him to bear the blame for the huge losses and dodgy deals, the board has implicitly admitted that it too has stained hands and should bear some responsibility for the losses.

By agreeing to the retirement option, the board has allowed O’Neal to keep the $US48 million he was paid last year when the groundwork for the dodgy deals and investments were being overseen by him. It also allowed him to keep deferred compensation in the form of unvested shares worth $US90 million.

Those unvested shares were for bonuses paid in shares based on past performance. That past performance is now shown to have been illusory, given the $US7.9 billion in losses. And, there’s also other shares and benefits. All this for driving Merrill’s to a loss of $US2.24 billion in the third quarter, and possibly more this quarter.

What’s offensive about this is that O’Neal drove his managers and executives to do riskier deals to boost profits (which the board liked). He had a bad reputation on Wall Street for being a hard driving manager who didn’t listen. Their remuneration was based on those profits. There has no downside risk for O’Neal and others.

Finally, there’s a great irony in all of this. Back in 2001, O’Neal seized power at Merrills by bagging his predecessor, David Komansky, whose expansion deals culminated in a $US1.7 billion charge in the fourth quarter of 2001.

O’Neal’s third-quarter loss beats that hands down and Merrill may have to write down another $US4 billion in the fourth quarter, according to analysts at other investment banks.

Meanwhile, UBS has already flicked its CEO (cheaply) because of big write downs and losses, but it seems more might be ahead for Europe’s biggest investment bank.

Having revealed a third quarter operating loss of $US712 million, UBS has now warned that credit losses are likely to wipe out any gains from its investment banking division in the fourth quarter, though the group as a whole should return to profit.

UBS’s problems stem from its Dillon Read financial services group in the US. It’s been closed at a cost of $US300 million but it lost over $US400 million in the first six months of this year. Last year it accounted for 17% of UBS’s worldwide revenue, or $US1.7 billion, according to reports overnight.

Finding that revenue elsewhere in the world is going to be tough when all its competitors are doing the same thing. UBS has spent US1.2 billion buying new businesses in Europe and Asia in recent months to try and make up for the shortfall from the US.

And more bad news is on the way from Europe’s big banks. Tomorrow Deutsche Bank, Germany’s largest bank, reports third quarter earnings tomorrow. It has already indicated that third-quarter profit rose at least 13% to more than 1.4 billion euros (or $US2 billion), helped by a tax gain. What investors want to know is the quantum of losses incurred and probable in those third quarter figures.

Likewise with Credit Suisse which reports on Thursday night. It says its profit from “continuing operations” rose 6%, but what about losses? 

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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