Too Big to Fail [82]
“I think this is a great firm—but greatness is not an entitlement,” O’Neal remarked at the time. “There are some things about our culture I don’t want to change…but I don’t like maternalism or paternalism in a corporate setting, as the name Mother Merrill implies.”
The management turnover that accompanied his ascension was likewise startling: Even before he officially became chief executive in December 2002, almost half of the nineteen members of the firm’s executive committee were gone. It became clear that O’Neal would force out anyone whom he had any reason to distrust. “Ruthless,” O’Neal would tell associates, “isn’t always that bad.”
If a colleague dared stand up to him, O’Neal was famous for fighting back. When Peter Kelly, a top Merrill Lynch lawyer, challenged him about an investment, O’Neal called security to have him physically removed from his office. Some employees began referring to O’Neal’s top-management team as “the Taliban” and calling O’Neal “Mullah Omar.”
As well as by vigorous cost cutting, O’Neal had plans to make Merrill great again through redirecting the firm into riskier but more lucrative strategies. O’Neal’s model for this approach was Goldman, which had begun aggressively making bets using its own account rather than simply trading on behalf of its clients. He zealously tracked Goldman’s quarterly numbers, and he would hound his associates about performance. As it happened, O’Neal lived in the same building as Lloyd Blankfein, a daily reminder of exactly whom he was chasing. Blankfein and his wife had come to jokingly refer to O’Neal as “Doppler Stan,” because whenever they’d run into him in the lobby, O’Neal would always keep moving, often walking in circles, they thought, to avoid having a conversation.
O’Neal did force through a transformation of Merrill that, in its first few years, resulted in a bonanza. In 2006, Merrill Lynch made $7.5 billion from trading its own money and that of its clients, compared with $2.6 billion in 2002. Almost overnight, it became a major player in the booming business of private equity.
O’Neal also ramped up the firm’s use of leverage, particularly in mortgage securitization. He saw how firms like Lehman were minting money on investments tied to mortgages, and he wanted some of that action for Merrill. In 2003 he lured Christopher Ricciardi, a thirty-four-year-old star in mortgage securitization, from Credit Suisse. Merrill was an also-ran in the market for collateralized debt obligations, which were often built with tranches from mortgage-backed securities. In just two years Merrill became the biggest CDO issuer on Wall Street.
Creating and selling CDOs generated lucrative fees for Merrill, just as it had for other banks. But even this wasn’t enough. Merrill sought to be a full-line producer: issuing mortgages, packaging them into securities, and then slicing and dicing them to CDOs. The firm began buying up mortgage servicers and commercial real estate firms, more than thirty in all, and in December 2006, it acquired one of the biggest subprime mortgage lenders in the nation, First Franklin, for $1.3 billion.
But just as Merrill began moving deeper into mortgages, the housing market started to show its first signs of distress. By late 2005, with prices peaking, American International Group, one of the biggest insurers of CDOs through credit default swaps, stopped insuring securities with any subprime tranches. Ricciardi, meanwhile, having built Merrill into a CDO powerhouse, left Merrill in February 2006 to head a boutique investment firm, Cohen Brothers. With his departure, Dow Kim, a Merrill executive, sought to rally those who stayed behind on the CDO front. Merrill, he promised, would maintain its ranking as the top CDO issuer, doing “whatever it takes.” One deal Kim put together was something he called Costa Bella—a $500 billion CDO, for which Merrill