Subprime lending debacle's first top executive "victim"

By Darrell A. Williams
Guest Contributor

Unless you’ve been living under a rock, you already know that the drive-by shooting otherwise known as the sub-prime mortgage debacle has claimed its first high-profile victim.  Until his “retirement” a couple of days ago, Stanley O’Neal was sitting precariously atop the world’s largest brokerage firm, Merrill Lynch.  The financial behemoth had just announced a $7.9 billion (yes, that’s with a “B”) OOOPS in the form of a write-down of its huge exposure to collateralized debt obligations also known as "CDOs". 

These are securities backed in part by the sometimes interest-only, usuriously adjustable mortgages taken on by sub-620 borrowers to finance their “deee-luxe apartment in the sky”. When borrowers of some of these mortgages began to default, the value of many CDOs dropped to pennies on the dollar if they had any value at all.  Merrill had huge exposure to the CDO market and was the largest originator of CDOs in 2006.  The write-down of this exposure resulted in a loss of $2.3 billion in the third quarter, compared to a $3 billion profit for the same quarter last year. 

Those of us concerned with African-American participation at the “C-Level” – as in Chief (Executive, Financial, Technical, etc.) Officer – can’t help but feel some level of disappointment.  Mr. O’Neal, along with Time Warner’s Richard Parsons, American Express’ Kenneth Chennault and others, ushered in a new era of possibility for ambitious corporate denizens of color.  Their very presence confirmed the ideal of corporate meritocracy and gave credence to the assertion that corporate boards and the shareholders they work for are concerned with only one color.

I submit to you that Mr. O’Neal’s departure goes most of the way in saying the exact same thing.  I mean this shareholder disaster did occur under his watch.  He has run Merrill for six years so there is no predecessor to blame.  Merrill did at first underestimate the size of the write down by over $3.0 billion it first announced it. Mr. O’Neal did tell shareholders that Merrill’s year ago acquisition of sub-prime originator First Franklin (for a cool $1.3 billion) would positively impact earnings by the end of this year.  I don’t know how much his merger gambit with Wachovia impacted his relationship with his board but it could not have helped.  All this to say that I don’t think there will be a great deal of righteous indignation on behalf of Mr. O’Neal, nor should there be.

The real question is can a White man lose $8 billion and keep his job?  I suspect that at Merrill Lynch and other companies truly answerable to shareholder interests, we can quote that astute business observer Whitney Houston with a hearty “Hell-to-the-Naw!”  I’d like to think that the loud clucking sound we’re hearing is a seriously large number of chickens coming home to roost and that the $160 million Mr. O’Neal is going home with won’t be the only compensation package making corporate governance activists reach for the Hator-ade.   Other boards should be looking at shareholder losses from the CDO mess with the same chagrin and holding their respective leaderships equally responsible.

Stanley O’Neal is the first CEO to head for the door as a result of the sub-prime fiasco.  He shouldn’t be the last.

Darrell A. Williams is founder and Managing Member of DuSable Capital LLC, a financial investment and advisory practice targeting growth oriented companies and the organizations (private equity funds, business development groups, etc.) that support them.

Comments

[rikyrah]

Well, the head of Citigroup just got the boot because of subprime too.