Subprime Suspect.(E. Stanley O'Neal)(Brief biography)

On the morning of March 7th, E. Stanley O'Neal, the former C.E.O. of Merrill Lynch, the nation's biggest brokerage house, appeared before the House of Representatives Oversight and Government Reform Committee for what Thomas Davis, the ranking Republican on the committee, described with dismay as a "public flogging." The official subject of the hearing was "C.E.O. pay and the mortgage crisis," and the committee had summoned O'Neal and two other disgraced chief executives--Angelo Mozilo, a co-founder of Countrywide Financial Corporation, America's biggest mortgage lender, and Charles Prince, the former C.E.O. of Citigroup--to explain why they had been handsomely remunerated even as their firms lost billions of dollars on bad bets in the subprime mortgage market and thousands of American homeowners faced foreclosure. Mozilo had sold more than a hundred and fifty million dollars' worth of Countrywide stock in 2006 and 2007, shortly before the subprime crisis erupted, and Prince, who resigned in November after Citigroup declared huge losses on its mortgage investments, had been awarded a ten-million-dollar bonus. But it was Merrill Lynch that had announced the biggest mortgage-related write-off--nearly eight billion dollars, at the time the largest in Wall Street's history--and it was O'Neal, the first African-American to run a major Wall Street firm, who had received the biggest payoff: a hundred and sixty-two million dollars, when he was forced to retire, last October.

A tall, slim man of fifty-six, with light-brown skin, closely cropped gray hair, and a regal bearing, O'Neal was nattily attired in a black suit, a white dress shirt, and a purple silk tie with white polka dots. When it was his turn to address the committee, he pulled a microphone toward him and, in a measured voice, read a prepared statement, which began, "Whatever I have achieved in life has been the result of the unique combination of luck, hard work, and opportunity that can only exist in this country. My grandfather, James O'Neal, was born into slavery in 1861." He briefly described his twenty-year career at Merrill, which culminated in five years as chairman and chief executive. "There has been some press about my so-called 'severance package,' '' he said, and explained that the hundred and sixty-two million dollars consisted mostly of deferred compensation, stock, and options that he had accumulated in previous years.

O'Neal made no apology for Merrill's role in marketing securities tied to subprime mortgages, and he answered most of the questions put to him by the committee in a word or two. As the hearing drew to a close, the committee's chairman, Henry Waxman, reprimanded John Finnegan, who represented Merrill Lynch's board at the hearing, for allowing O'Neal to retire, with his stock and options intact, rather than firing him. "Your company lost $2.4 billion in the third quarter, $10.3 billion in the fourth quarter--the largest quarterly loss in the company's history," Waxman said. "By the end of last year, your stock had plummeted forty-five per cent from its high in the previous January. If that doesn't qualify as poor performance that justifies terminating your C.E.O. and maybe others as well for cause, it's hard to understand what does." He went on, "Our economy is suffering. Thousands are losing their jobs. And it seems like everyone is hurting except for the C.E.O.s who had the most responsibility."

Almost as remarkable as the circumstances surrounding O'Neal's departure from Merrill was the vitriol directed at him--scathing assessments not just of his conduct as C.E.O. but also of his character. In New York, Jim Cramer, the host of "Mad Money," on CNBC, wrote, "This was the most compelling case for a firing that I've ever come across that didn't involve outright embezzlement. . . . This man was Wall Street's Wicked Witch, a much-feared, totally unrespected hatchet man who appeared to be beloved by his troops but in reality didn't have a friend in the joint. . . . I swear you could hear the cheering from downtown after he left." On Bloomberg.com, Michael Lewis cited O'Neal's entries on a Web site where amateur golfers post their scores, pointing out that in August and September he had played at least twenty rounds. "As Merrill's losses mounted, we know exactly where Chief Executive Officer Stan O'Neal was, what he was doing, and with whom," Lewis wrote. "On a golf course. Golfing. By himself." In Wall Street's trading rooms, the address for the Web page circulated on e-mail like a hot stock tip.

Former colleagues of O'Neal's, including some whom he forced out of Merrill, inveighed against him. "I wouldn't hire Stan to wash windows," one told me in November. "What he did to Merrill Lynch was absolutely criminal." David Komansky, who preceded O'Neal as Merrill's C.E.O., said, "The thing I resent about Stan's tenure is his attempted destruction of the value system and culture that existed at Merrill Lynch. That ultimately contributed to his downfall. By the time the subprime thing happened, he had no one left who supported him." Komansky went on, "When you are abusive as he was, so many times, to so many people, over such a long time, eventually things catch up with you."

Five months have passed since O'Neal was forced to retire, and we now know that Merrill's losses on mortgage securities, although greater than any other financial firm's, were hardly unique. Citigroup, Bank of America, Morgan Stanley, Wachovia, Deutsche Bank, Credit Suisse, UBS, and HSBC have all announced multibillion-dollar write-offs. Last week, the investment bank Bear Stearns, after its investments in mortgage-backed securities brought it to near-bankruptcy, agreed to be acquired by J. P. Morgan Chase for two dollars a share--less than seven per cent of its stock-market value two days earlier. "It is clear, in retrospect, that there was a sector tsunami," Glenn Hutchins, the co-head of Silver Lake, a technology-investment firm and a client of Merrill's, said to me. "Merrill Lynch was simply the first to experience the shockwave. Stan was the first person who had to report the impact, and he was in the spotlight. If you look back at it now, you see that almost everybody had trouble, too."

With the exception of the remarks that he made in Washington, O'Neal has declined to comment publicly on his resignation. In a typically understated statement that he provided to me, he wrote, "The bottom line is, despite our best efforts, a lot of money was lost in this one area"--mortgage securities--"and I, as the chief executive of the firm, was held accountable. At the same time, the record over all is that we--the firm under my leadership--did a lot of things that benefitted Merrill Lynch greatly and will continue to benefit the firm in the years ahead."