Stan O’Neal

Stanley O’Neal, the CEO of Merrill Lynch is under scrutiny for a “major breach in corporate protocol.” His Board is upset that he allegedly discussed merger talks with at least one other firm without their knowing or approval. I’m not sure he needed either, but either way, they are upset. I guess they are going to show him.

The Merrill board is delusional. There seems to be some pretty big financial dudes on the Merrill Board. It seems they are more keyed in on protocol and Sarb-Ox than Risk Management.

Merrill, like all other firms in the sub-prime space still cannot evaluate their risk exposure. On a conference call recently, O’Neal could not put a number on how high the writedown from subprime losses will be in the next Quarter. I’ve seen various reports that estimate it anywhere between $3 and 5 Billion. Dishoom.

I think a bigger concern is that the risk management models that got them in trouble in the first place are still in use. VaR models and the phrase “marking to the models” work well in normal circumstances, but what’s normal anymore? Subprime slime has redefined Tail Risk. The Merrill Board should take a look at Risk Management and the leadership there. Changing captaincy on the Titanic after it hit the iceberg would not have helped, but it might have felt good. Icy!

When Traveler’s Group bought Solomon Bros. and ruined them by canning the entire Prop Trading Group, there was a small benefit – it eliminated the uncertainty of the variance of returns derived from their operations. Sanford was no idiot. He wasn’t going to take one in the “fat-tail” by something he didn’t understand or couldn’t quantify.

The Board of Directors of Merrill Lynch would be doing shareholders a much better service by getting their hands around the subprime morass (or is it more-ass in this case?) instead of effecting a hairtrigger response that feels good emotionally, and looks prudent politically, by canning O’Neal when the real risk to their entire operation is still thriving on their books.