A Costly Cleanup for Merrill's Mess

The problems at Merrill Lynch (MER) won't end with Stanley O'Neal's tenure. The company's board said on Oct. 30 that O'Neal would retire and give up his chief executive and chairman posts, in the wake of Merrill's announcement last week that it would take an $8.4 billion writedown. The board also elected director Alberto Cribiore as interim chairman and said he would lead the search for the firm's next CEO. The candidates to succeed O'Neal include Laurence Fink, chief executive of investment manager BlackRock (BLK), and John Thain, chief executive of NYSE Euronext (NYX).

But the challenges his successor will face are imposing. At the top of the list are issues with strategy and execution that led to staggering losses under O'Neal. In particular, the firm will have to sort out how willing—and able— it is to engage in high-risk, high-reward proprietary trading, a very different business from the brokerage operation that's long been the core of Merrill. It will also have to fix the problems with its risk-management approach, which contributed to losses. "Just because a new executive comes in at the top, investors shouldn't expect problems to go away overnight," says Kathleen Shanley, a credit analyst who follows Merrill for researcher Gimme Credit.