Oct. 29 (Bloomberg) -- Losing a lot of money for shareholders is the surest way to end a career on Wall Street, as Merrill Lynch & Co.'s Stan O'Neal found out this month after the embattled chief executive officer delivered the worst news in the firm's 93-year history.

The third-quarter loss of $2.24 billion, or $2.82 a share, was about six times more than O'Neal acknowledged on Oct. 5 and derived from $8.4 billion of writedowns for the subprime mortgages, asset-backed bonds and loans gone bad under his watch.

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 board of 11, 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, according to a person with knowledge of the directors' discussions.

For Merrill, a firm that over nine decades built a corporate culture that promoted from within and gently nudged its chiefs into distinguished retirement, O'Neal's ouster is an abrupt departure. To his predecessors, many of whom resented his penchant for getting rid of dozens of Merrill loyalists, the losses are a painful reminder of how much has changed at the brokerage they used to call ``Mother Merrill.''

`It's Awful'

``I've been in touch with many, many of our fellow employees and ex-employees and they're sick, everyone is sick about it, as I am too,'' Daniel Tully, Merrill's CEO from 1992 to 1996, said in an interview this weekend. ``It's awful,'' he said, becoming the first former head of the brokerage to castigate O'Neal.

Merrill has risen 52 percent in New York trading since O'Neal took over on Dec. 2, 2002, while the 12-member Amex Broker/Dealer Index has surged 159 percent and shares of Goldman Sachs Group Inc., the biggest securities firm, have tripled. Merrill's stock rose $1.33, or 2 percent, to $67.42 at 4 p.m. in composite trading on the New York Stock Exchange.

Merrill risked becoming ``a snake pit with political infighting,'' Punk Ziegel & Co. analyst Richard Bove said in an interview yesterday. ``With Mr. O'Neal stepping aside, he avoids that.''

The shares have lost one third of their value in five months as rising U.S. subprime mortgage defaults led to a credit-market freeze in August. Merrill's short-term borrowings climbed 80 percent from the second quarter and shareholders' equity declined 9.6 percent. The size of Merrill's writedown equaled almost 25 percent of shareholders' equity in the third quarter and 42 percent of revenue in the first nine months of 2007. Goldman's $1.48 billion third-quarter writedown was 4.2 percent of equity.

List of Casualties

O'Neal discussed a possible merger with Wachovia Corp. CEO Ken Thompson earlier this month without consulting Merrill directors, the New York Times reported Oct. 26, citing people with knowledge of the matter. The bid to replace O'Neal is being led by board member Armando M. Codina, the Financial Times reported.

Any severance package will be at the discretion of the Merrill board compensation committee, according to an April regulatory filing.

Surging defaults on home loans in the U.S. have caused prices for mortgage-backed and related bonds to plunge, triggering a flight by investors from risky investments that's spilled into markets for short-term ``commercial paper'' and high-yield loans. A lack of funds forced the U.K. bank Northern Rock Plc to tap the Bank of England as a lender of last resort, sparking the first run on a bank in the country in more than 100 years.

Losses, Writedowns

The world's largest banks and securities firms announced more than $30 billion of third-quarter losses from writedowns or bad debt.

A growing list of Wall Street and bank executives have lost their jobs. UBS AG in July dismissed former CEO Peter Wuffli and earlier this month said finance chief Clive Standish and investment-banking head Huw Jenkins were stepping down. Others who have been ousted or have departed in management shakeups include Bear Stearns Cos. Co-President Warren Spector and Citigroup Inc. trading head Thomas Maheras.

O'Neal dismissed his head of fixed-income trading, Osman Semerci, and a deputy, Dale Lattanzio, earlier this month.

Depleted Ranks

Merrill's directors must now decide whether a new CEO exists in the firm's depleted ranks or look outside since O'Neal pushed out so many of the leaders groomed by Tully and his successor, David Komansky. Komansky declined to comment.

Among the casualties were Thomas Patrick, fired as executive vice president in 2003, and Arshad Zakaria, who resigned as head of investment banking eight days later. Last year, in a shakeup designed to make Merrill more of a risk-taker, O'Neal dismissed six of the top executives in the firm's fixed-income department, Doug DeMartin, Harry Lengsfield, Jeff Kronthal, Tom Saylak, Macauley Taylor and Jeff Chandler.

``He got rid of people with hundreds and hundreds of years of experience,'' said Winthrop Smith, who left as head of Merrill's international brokerage after O'Neal became president in 2001. ``When you get rid of people who have gone through problems in the past, you increase the probability that a mistake is going to happen again.''

O'Neal's spokesman, Jason Wright, didn't return calls seeking comment. Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

Enter Fink

Now Laurence Fink, the 54-year-old BlackRock Inc. chief who swapped a 49.8 percent stake in his company for Merrill's asset- management unit last year, is considered a top contender by analysts to replace O'Neal. Other candidates include Merrill Co- President Gregory Fleming, 44, and Robert McCann, 49, head of the brokerage unit.

Merrill beat out Citigroup to become the biggest underwriter of collateralized debt obligations, securities that mostly hold pieces of junk-rated corporate bonds, mortgage bonds, high- interest loans, derivatives or even other CDOs.

O'Neal put more of the firm's capital at risk by investing it directly in leveraged buyouts including British retailer Debenhams Plc, car-rental company Hertz and HCA Inc., the U.S. hospital chain. Then Merrill bought subprime lender First Franklin for $1.3 billion in December, just as the real-estate market peaked and mortgage delinquencies began accelerating.

More Like Goldman

His strategy transformed Merrill into a firm that looked less like the one Tully, now 75, bequeathed and more like Goldman Sachs. Last year, Merrill's brokerage produced 34.9 percent of revenue, down from 49.3 percent in 2002, the year O'Neal took over as CEO, according to company reports.

Profit and pay soared. Net income rose 47 percent last year to a record $7.5 billion, and O'Neal took home $48 million in compensation -- $20 million more than in 2003. Only Goldman CEO Lloyd Blankfein earned more.

Merrill may have to cut the value of its holdings by an additional $4 billion in the fourth quarter, according to estimates by analysts at CIBC World Markets. Goldman, UBS AG, Wachovia and Sanford C. Bernstein & Co. analysts cut their recommendations on Merrill from the equivalent of buy to hold.

O'Neal was ensnared by the very culture he fostered at Merrill. Under his leadership, executives who outgrew their usefulness were more readily cast out or bumped down.

Mother Merrill, a term sometimes used to describe the firm as more forgiving and loyal than its Wall Street rivals, rankled O'Neal. He said a business should be driven more by performance than by tenure and relationships.

Mother Merrill

``The Mother Merrill, cradle-to-grave thing isn't possible to do,'' O'Neal said in 2002, shortly before becoming CEO. ``It's not even smart to do.''

O'Neal's climb began in the kudzu-carpeted hills and hollows of his hometown of Wedowee, Alabama. His grandfather, born into slavery in 1862, held about 1,000 acres in the area when few black people were landowners and was one of the first to buy a car and cotton gin.

E. Stanley O'Neal was born in nearby Roanoke, Alabama, in October 1951. His education began at a one-room school with an outhouse, neighbors recalled.

When O'Neal was 11, his father moved the family 90 miles away to a public housing project in Atlanta. The elder O'Neal landed a job on General Motors Corp.'s Doraville assembly line when it was opened up to black workers. O'Neal joined him after graduating from high school.

GM Assembly Line

He wasn't content to stay in the factory, though, and took advantage of GM's program that helped workers attend college. O'Neal graduated from General Motors Institute, now Kettering University, by alternating stints of 24 weeks in a Michigan classroom and 24 weeks on the assembly line.

Next came a scholarship from GM to study at Harvard Business School. After receiving his MBA, O'Neal went to work at GM's treasurer's office. Arranging transactions such as the issuance of tracking stock for GM's Hughes Electronics and Electronic Data Systems units whetted his appetite for investment banking and complex financial transactions.

``It was exciting; it was innovative; there was a sense of urgency,'' O'Neal said in 2002. ``I wanted to keep doing those kinds of things.''

At 35, older than most new investment bankers, he joined Merrill's high-yield-bond department. Within three years, he was running the group, which competed head-to-head with Michael Milken's Drexel Burnham Lambert Inc. When Milken pleaded guilty in 1990 to securities fraud, it opened the way for O'Neal's unit to become the biggest junk-bond underwriter for five straight years.

Herbert Allison

O'Neal was promoted by Herbert Allison, then head of the firm's corporate and institutional client group, to oversee debt and equity capital markets. Allison is now chief executive officer of New York-based pension fund TIAA-CREF.

In 1997, after Komansky became Merrill's CEO and Allison was made president, O'Neal became co-head of the corporate and institutional client group, which includes investment banking and securities trading. Just a year later, he moved up to chief financial officer.

Komansky, now 68, picked O'Neal to succeed Launny Steffens as head of the brokerage division, Merrill's most prominent unit, in 2000. In the Merrill way, Steffens stayed on as chairman of the division.

O'Neal's appointment was a test of his ability to manage an unfamiliar division, Komansky said. O'Neal was an investment banker turned CFO who had never served among Merrill's 15,000 brokers.

Market Peaks

The promotion came at a pivotal time. O'Neal became head of the world's biggest brokerage business as history's longest bull market was reaching its peak. The Dow Jones Industrial Average topped out at 11,750 a month before his appointment, and the Standard & Poor's 500 Index and the Nasdaq Composite Index reached their highs a month later.

Almost immediately, O'Neal quit advertising Merrill's Internet trading service. He accelerated an effort to have Merrill's army of brokers focus on getting more millionaires as clients.

The brokerage's financial results outpaced margin improvement in Jeffrey Peek's asset-management division, which Komansky said assured O'Neal's anointment as heir apparent.

He still had to wrest the job from other contenders who were maneuvering for it. Win Smith, Thomas Davis and Peek raced to improve results in their respective units, international brokerage, investment banking and capital markets, and asset management.

Best Candidate

Komansky had promised to name a successor by year-end. O'Neal was the best candidate and was always his choice, Komansky said in a 2002 interview.

``I feel very strongly that it was going to take a specific skill set to be able to manage the firm where it had to go,'' Komansky said. O'Neal had shown that he could manage effectively in tough times, Komansky said.

O'Neal said he spent his first six weeks as president meeting with executives throughout the firm and thinking about new jobs for some of them, just as he had when moving into previous roles.

After the terrorist attacks on Sept. 11, 2001, O'Neal accelerated his timetable for change. He eliminated 14,800 jobs and closed 266 offices around the world, dismantling the international empire that Komansky built during the previous five years.

Pushing Out Rivals

He also pushed out the men who had been his rivals for the top job, Peek, Smith and Davis. Smith, whose father had helped run the firm with founder Charles Merrill, resigned. Peek, Davis, Steffens and Allison couldn't be reached for comment.

The reorganization ran counter to Merrill's ``culture of teamwork, compatibility and stability of their senior management,'' Henry Higdon, a recruiter who placed senior executives at Wall Street firms for decades, said at the time.

Investors and executives asked whether O'Neal had usurped all of Komansky's power.

``In a perfect world, I would have loved to have seen some of those people not leave,'' Komansky said later.

O'Neal's emphasis on profitability also overtook the firm's focus on market share.

After Merrill took a $1.7 billion charge in the fourth quarter of 2001 to pay for losses from acquisitions made by Komansky, O'Neal directed investment bankers to focus on winning the most lucrative business. He demanded that his new executives figure out a way to improve efficiency.

Frustrating, Demoralizing

``The worst thing you can do is take talented people and put them up against a problem or market opportunity that has changed dramatically and tell them to keep doing it in the same way,'' O'Neal said in 2002. ``You wind up frustrating and demoralizing people.''

It fell on O'Neal to guide Merrill through legal challenges that began in April 2002, when New York Attorney General Eliot Spitzer charged that some of the firm's analysts had misled investors with research tainted by their role in helping win investment banking assignments. Spitzer, now governor of New York, released e-mails in which analysts disparaged stocks that they publicly praised.

Merrill, which paid a $100 million fine, said the e-mails were taken out of context. Komansky, not O'Neal, publicly apologized.

``It happened on my watch,'' Komansky said. O'Neal became chief executive in December 2002, and Komansky left the firm in April 2003.

Komansky, receiving the treatment reserved for retiring Merrill chiefs, was given an office on Manhattan's Fifth Avenue. Tully, meanwhile, had been serenaded by Irish tenor Finbar Wright with the song ``Danny Boy'' at the firm's annual meeting after announcing a record quarterly profit. O'Neal may not be so fortunate.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: October 29, 2007 16:17 EDT