Nov. 1 (Bloomberg) -- It's called the ``hit-by-the-bus scenario,'' says Daniel Tully, the former Merrill Lynch & Co. chief executive officer. That's how power transfers were done at the largest U.S. brokerage ever since founder and directing partner Charles Merrill died in 1956.

``We spent days, months talking about succession planning,'' said Tully, 75, who retired a decade ago after heading the firm for four years in the 1990s. ``You had to use the proverbial bus accident and write down for the board who you would recommend to take over if something happened to the chairman.''

For the first time in its nine-decade history, Merrill doesn't have a new leader from within to fill the void left by Stan O'Neal's ouster this week. O'Neal eliminated so many senior executives during his five years as CEO that there is no apparent successor among the firm's 64,200 employees.

Investors are dependent on Alberto Cribiore, 62, the interim non-executive chairman, to make the choice. The private- equity executive was recruited to the board by O'Neal in 2003 and has never brokered a stock trade or sold collateralized debt obligations -- the securities that stuck Merrill with a $7.9 billion write-down. Cribiore represents board members who gave O'Neal a free hand and ignored the warning signs of looming debt-market losses, according to Merrill investors.

``There was a brain drain to some extent that left Merrill over the years, and there was no one around to question Stan's actions because he didn't tolerate dissension real well,'' Tully said in a telephone interview. ``It is sad that we think we have to go outside.''

Leading Outside Contender

The leading outside contender for CEO may be Laurence Fink, 54, who sold almost 50 percent of BlackRock Inc., the money management firm, to New York-based Merrill last year.

Fink, who had dinner last week with O'Neal, ``hasn't had any contact with Merrill Lynch board members about becoming the chief executive officer,'' said a person familiar with the situation.

BlackRock spokesman Brian Beades declined to comment.

``They might have some people in mind, but they want to see what else is out there,'' said Jeanne Branthover, managing director of Boyden World Corp., an executive recruiter in New York who said she isn't working for Merrill. The search will take at least a month and as many as four, she said. ``They're going to make sure they do very strong reference-checking.''

Merrill traditionally let heirs apparent serve as No. 2 for a year or two. That's how power passed from Charles Merrill, to Winthrop Smith Sr., Michael McCarthy, George Leness, James Thomson, Donald Regan, Roger Birk, William Schreyer, Daniel Tully, David Komansky and ultimately O'Neal.

Culture of Firm

``The culture of the firm has been damaged,'' said Winthrop Smith Jr., 58, the former head of Merrill's international brokerage division who quit in 2001 after losing the race for the top job to O'Neal. His father was a named partner of the firm's operating subsidiary, Merrill Lynch, Pierce, Fenner & Smith Inc. ``The question is, Can it recover.'

O'Neal's successor faces a stock price that has lost 29 percent this year, the third-worst performance of the 12 largest U.S. brokerage stocks. Yesterday, the shares rose 81 cents, or 1.2 percent, to $66.02 in New York Stock Exchange composite trading.

Merrill shares tumbled 5.8 percent on Oct. 24, the day O'Neal reported a third-quarter loss six times larger than the firm had forecast less than three weeks earlier. The stock surged 8.5 percent Oct. 26 on speculation O'Neal would be replaced.

There is also the threat of a credit-rating downgrade and the possibility that Merrill may have to take further write- downs on its $20.9 billion book of subprime mortgages and CDOs. On Oct. 24, Standard & Poor's cut Merrill's credit rating to A+ from AA-and said the outlook was negative, because of ``concerns regarding the company's risk management.''

`Pretty Free Rein'

``Cribiore will now have to decide what the board agenda will be,'' said Roy Smith, a finance professor at New York University and former partner at Goldman Sachs Group Inc. ``Boards of directors of large companies cannot be expected to be ahead of the curve. Their job is to react when the curve runs out.''

O'Neal's downfall can be traced in part to directors' failure to police his management, says Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees.

O'Neal had ``pretty free rein'' over a board that was ``asleep at the switch,'' says Ferlauto, who represents members with more than $1 trillion in public pension funds. It holds 6,000 Merrill shares.

All but two of Merrill's 10 outside directors were installed under O'Neal, including Cribiore. O'Neal's pay was approved by the board's management development and compensation committee, led by Cribiore, who received $291,595 from Merrill last year.

Biggest CDO Underwriter

O'Neal was paid $164 million from 2003 through 2006, according to filings. During that period, Merrill made increasingly bigger bets on instruments tied to risky home loans.

Merrill beat out Citigroup Inc. to become the biggest underwriter of collateralized debt obligations, bonds created by packaging other debt securities. O'Neal put more of the firm's capital at risk by investing directly in leveraged buyouts and paid $1.3 billion last year for subprime lender First Franklin Financial Corp. as mortgage delinquencies began accelerating.

Cribiore, an Italian-born opera buff who favors the American soprano Renee Fleming, serves on the board of the Metropolitan Opera in New York. He is manager of the $680 million New York-based buyout fund Brera Capital Partners LLC, which he started in 1997.

`High-Ego Personalities'

Brera's performance has trailed even the broad market indexes that hedge-fund and private-equity managers promise to beat. The fund had an annualized return during the past five years of 9.8 percent, according to the Teachers' Retirement System of Louisiana, an investor in the fund. That compares with a 15 percent average for the Standard & Poor's 500.

Cribiore first got into the U.S. financial services market with Exor Group SA, an investment company controlled by Italy's Agnelli family. He was vice president of corporate development for North America. He then became senior vice president for mergers, acquisitions and divestitures with Warner Communications Inc., where he worked three years beginning in 1982 and was a protege to the company's late CEO, Steven Ross.

``Members of the entertainment and media world are high-ego personalities,'' said Luis Rinaldini, a managing director of New York-based Groton Partners LLC, who worked on deals with Cribiore in the 1980s. ``He would be familiar with the kinds of egos you would see in investment banking.''

``He has all the business acumen and analytical abilities to help the board find the right person for Merrill,'' said Herald ``Hal'' Ritch, a former Donaldson Lufkin & Jenrette investment banker who worked on transactions with Cribiore when he was at Warner Communications, and who is now co-CEO of Sagent Advisors Inc. ``He's a quick study on things. He'll give them some decisive leadership they need right now.''

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: November 1, 2007 00:15 EDT