Why Merrill Lynch Got Burned

The blast of criticism directed at Citigroup (C) Chief Executive Officer Charles O. Prince III, whose stewardship of the nation's biggest bank has drawn barbs, has been withering in recent weeks. Yet Prince may have caught a huge break, courtesy of Merrill Lynch CEO E. Stanley O'Neal. On Oct. 24, O'Neal's firm officially became Wall Street's biggest loser in the subprime game.

Merrill's stunning $7.9 billion third-quarter writedown—the result of a sharp drop in the value of securities backed by risky home loans—is the most painful hit taken by a Wall Street bank during the subprime housing blowout. Even worse, the size of the writedown is nearly $3 billion more than Merrill had forecast on Oct. 5. The charge is an embarrassment for O'Neal and Merrill (MER), which reported its first quarterly loss in six years on Oct. 24, and stems from Merrill's big push into collateralized debt obligations—securities backed by subprime mortgages that are sold to investors based on their risk appetite.