Analyzing Leadership Decisions: Stan O'Neal

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International Research Journal of Marketing and Economics (IRJME) ISSN: (2349-0314)
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International Research Journal of Marketing and Economics
Vol. 3, Issue 10, October 2016 IF- 3.949 ISSN: (2349-0314)
© Associated Asia Research Foundation (AARF)
Website: www.aarf.asia Email : editor@aarf.asia , editoraarf@gmail.com
ANALYZING LEADERSHIP DECISIONS: STAN O’NEAL AND
MERRILL LYNCH
Kimberly Hardy (Charleston University, U.S.A.),
Keaton Epps, James Ondracek, Andy Bersch, & M. Saeed ( Minot State University, U.S.A.)
ABSTRACT
Decision making in leadership has important implications on the health of an
organization. The more effective companies tend to have senior leaders who incorporate tools
and processes that help insure accuracy and reduce biases in their decision making. For those
companies without such leaders, lapses in judgment can have serious repercussions. More than
ever, today’s global information age requires leaders to display a flexible and comprehensive
approach to problem solving, conflict management, and decision making. This study will analyze
how former CEO of Merrill Lynch, Stan O’Neal’s poor decisions ultimately ended Merrill Lynch
as an independent entity and contributed to the 2008 financial crisis.
Key Words: Leadership, Decision-Making, Stan O'Neal, Merrill Lynch, Derivatives, Ethics,
Risk Management, Conflict Management
Background of Stan O'Neal
O‘Neal was born into poverty in Wedowee, Alabama and picked cotton on a family farm
as a young boy while his mother worked as a cleaning lady (Ellis, 2007). His father worked at
General Motors (GM) and O‘Neal began with the company as a teenager in the plant. O‘Neal
was soon chosen to attend the General Motors Institute, where he obtained a degree in industrial
administration. GM also provided O‘Neal with a scholarship which paid for his MBA that he
received from Harvard (Ellis, 2007). As a Harvard graduate, he ascended from an entry-level
analyst to a director in the treasurer's office as he worked at General Motors for eight years

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earning the reputation of being a hard worker (Thornton, 2001). After his time with General
Motors, O‘Neal joined Merrill Lynch in 1986. He continued his career in finance by joining
Merrill Lynch‘s high-yield department. After just three years of working in this department, he
began to run it beginning his executive ascent at Merrill Lynch (Grey, 2007).
O’Neal’s Rise in Merrill Lynch
As head of Merrill Lynch‘s high yield bond segment, O‘Neal led a group of young vice
presidents in a sales drive to attract new clients. Later when he became chief financial officer
(CFO) of Merrill Lynch, he led the company through a liquidity crisis and developed a program
that would prevent this particular problem from occurring again (Thornton, 2001). Shortly after
becoming CFO, O‘Neal received another promotion in 2000 to lead one of Merrill‘s more
prominent departments, the brokerage division. Stan O‘Neal‘s success in leading the company‘s
brokerage operations came by reducing payroll 13% and personal service for small accounts
while acquiring high-end banking accounts with $1 million or more in assets (Thornton, 2001).
Using this strategy, the company doubled the amount of revenue per dollar in assets and reduced
operating costs by $800 million (Thornton, 2001). O‘Neal was present at the World Trade Center
on September 11, 2001 and led 9,000 employees in a temporary office until the team was moved
back to headquarters. After the attack he also let go 20,000 employees and closed 266 offices
worldwide (Grey, 2007).
While seen as aggressive and sometimes ruthless, these events and the outcomes they
represented earned O‘Neal a great deal of respect among his peers. In 2001 Merrill Lynch
appointed Stan O‘Neal to be the company‘s the chief operating officer (COO) (―Table: Merrill‖,
2001). With his ascent to COO, O‘Neal became the first African Americans to run a major
investment bank (Thornton, 2001).
As America‘s largest brokerage and one of the nation‘s top three investment banks,
Merrill Lynch was known for extravagant spending and thin profit margins (Thornton, 2001).
When Stan O‘Neal was named Merrill Lynch‘s chief executive officer (CEO) in the beginning of
2002, the firm‘s stock price had declined by 31.7% (Thornton, 2001). And it was O‘Neal‘s
charge to improve the company‘s profit margin and maintain the 87 year old company‘s
independence (Thornton, 2001).

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Derivatives: A New Opportunity
Derivatives are security assets meant to manage risk. They consist of a financial contract
that derives its value from the risk involved with the underlying asset. A derivative can further be
defined as a risk transfer agreement, which derives its value from the underlying asset (―Product
Descriptions‖, n.d.). The underlying asset can include ―an interest rate, a physical commodity, a
company‘s equity shares, an equity index, a currency, or virtually any other tradable instrument
upon which parties can agree‖ (―Product Descriptions‖, n.d., para. 1). This financial
management tool falls into three major categories; traded over-the-counter, exchange traded, and
those routed through a central clearing housing.
Over-the-counter derivatives are customized bilateral agreements that transfer risk from
one party to another and are sometimes called swaps that are negotiated privately between two
parties (―Product Descriptions‖, n.d.). Swaps are also considered bilateral agreements but
exchange cash flows at specified intervals during the agreed life of the transaction. Loss on a
swap takes place when the counterparty defaults and the swap remains positive for the party that
did not default. The actual amount of risk in a swap is associated with its relative credit exposure,
which is generally equal to the market value if positive, and zero if negative (―Product
Descriptions‖, n.d.).
This instrument evolved into a tool known as synthetic collateralized debt obligations
(CDOs) which consist of pools of loans and credit default swaps. The more complex derivatives
that incorporated mortgage loans involved a cornucopia of exotic, jumbo-sized contracts linked
to real debt (Morgenson, 2008).
An elite team at J.P. Morgan developed the initial structure of the synthetic CDO in 1997,
with the goal of reducing risk when loans were made to top–tier corporate borrowers
(Morgenson, 2008). Synthetic collateralized debt obligations were especially attractive to Wall
Street because they generated bigger fees than typical derivatives and were faster to put together
(Morgenson, 2008).
Super Senior Risk Management
Blythe Masters, one of the team members and pioneers of the synthetic CDO and former
head of J.P. Morgan‘s commodities division stated:
In 1997 and 1998, when we invented super senior risk, we spent a lot of time examining
how much is too much to have on our books. We would warehouse risk for a period of

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time, but we were always focused on developing a market for whatever we did. The idea
was we were financial intermediaries. We weren‘t in the investment business (Morgenson,
2008, para. 23).
However, a new financial tool that initially seemed like a good idea and was meant to insulate
against risk, was quickly misused. These unregulated products allowed questionable assets to be
passed off as higher–quality goods, providing a false sense of security for banks and investors
(Morgenson, 2008).
Why Unregulated?
The idea that markets were self-correcting and that the presence of regulation was in fact
harmful to banks was an era that was ushered in and nurtured by Alan Greenspan in 1987, after
taking the reins of the Federal Reserve as chairman. His beliefs in Ayn Rand‘s philosophy on
free–market capitalism were reflected in a statement made in Greenspan‘s memoir. In the Age of
Turbulence: Adventures in a New World, he provides his perspective on market regulation
stating:
Markets have become too huge, complex and fast moving to be subject to twentieth-
century supervision and regulations…regulators can still pretend to provide oversight, but
their capabilities are much diminished and declining. Regulation, by its nature, inhibits
freedom of market action, and that freedom to act expeditiously is what rebalances
markets. Undermine this freedom and the whole market-balancing process is at risk.
(Greenspan, 2007, para. 6)
Ethics and Decision Making
A source of moral failure in groups stems from people deviating from moral requirements
to help their group attain its goals (Hoyt & Price, 2013). Another factor that influences moral
decision making is the extent of power which people possess in a group. Leaders have greater
power and therefore have a greater chance of making unethical decisions in an effort to produce
group goals. Since CEOs hold a disproportionate amount of responsibility in both setting goals
and inspiring collective action to attain organizational goals, they ultimately are perceived to be
accountable for business mishaps as well as successes. The obligation of goal achievement
associated with the leader role contributes to the overvaluing of group goals, and an increased
confidence in the moral permissibility of using less than ethical means to achieve these goals

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(Hoyt & Price, 2013). In doing so, leaders feel more justified in making questionable decisions
for the organization.
Stan O’Neal’s Decision to Boost Profits
The decision to utilize risky financial instruments to supplement short term profits was
one of these questionable decisions. In 2002, when interest rates were low, investors were
pushed to seek higher returns and Merrill Lynch began utilizing a type of derivative called
synthetic collateralized debt obligations (CDOs) to achieve this. At a time when Merrill Lynch
was aggressively seeking new ways to profit from risk, Merrill Lynch looked outside the
company to AIG to insure the risk from these CDOs.
By 2005 both Merrill Lynch and Citigroup reaped fees from the CDO business of $100
million each (Cresci, 2005). This business consisted of the most popular cash CDOs that were
made up of commercial and residential mortgage backed securities, including home equity loans
and mortgage loans to individuals with questionable credit histories (Cresci, 2005). John Kansas,
the founder and former chief executive of North Fork Bankcorp who spent hours speaking with
top executives at Merrill Lynch, commented:
We spent a great deal of time with Stan (O‘Neal) and the entire management team at
Merrill trying to learn their business and trying to explain our business to them.
Unfortunately, in the end we were put off by the fact that we couldn‘t get comfortable
with their risk profile and we couldn‘t get past the fact that we thought there was a
distinct possibility that they didn‘t understand fully their own risk profile. (Morgenson,
2008, para. 29)
These meetings were in reference to generating in-house mortgages and for Merrill
Lynch to package them as CDOs to avoid outsourcing them. This move was largely due to
Merrill Lynch‘s reliance on AIG to insure its CDO stakes to limit potential damage from defaults
(Morgenson, 2008). For years, Merrill Lynch paid AIG to insure its CDO risk but once the CDO
business model became viral, AIG stopped insuring portions of the firms‘ portfolios. AIG
eventually refused to continue this practice, citing concerns of overly aggressive spending. This
left Merrill Lynch extremely vulnerable to risk. It is the failure of O‘Neal to understand the risk
of generating and holding CDOs that ultimately led to the downfall of Merrill Lynch itself.

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Meanwhile Back at the Ranch
Taking what he believed was a realistic perspective on the challenges that Merrill Lynch
faced, O‘Neal recognized the need to overhaul the investment firm‘s business operations saying,
―that means being properly positioned...it also means not expending resources on the things that
will not ultimately produce the growth and profits we want to achieve‖ (Thornton, 2001, para. 6).
His initial strategy included the layoff of 10,000 employees while redirecting Merrill Lynch‘s
investment bankers‘ focus on select industries where their relationships were strongest (Thornton,
2001). The approach to organizational cultural change was disruptive and meant to drastically
adjust Merrill Lynch‘s ―civil-service‖ mindset by changing the business model (Robertson &
Sullivan, 2009). Additionally, O‘Neal handpicked new executive team members, losing
experienced management in key senior leadership roles. O‘Neal‘s vow to increase profit margins
in two years included ordering his managers to reduce their expenses to previous levels.
O‘Neal made few allies and friends with layoffs, and drastic organizational culture and
management changes. His leadership style was autocratic and insular. In an interview conducted
in 2007 with National Public Radio, Derek Dingle, executive editor of Black Enterprise,
analyzed O‘Neal‘s style stating ―he listened to his own voice and he moved according to his own
strategy‖ (Moore, 2007, para. 18).
The need for O‘Neal to retrench stemmed from a prior strategy that failed. Merrill Lynch
estimated the numbers of the world‘s ultra-rich to grow by 8% annually and focused on
international account expansion that included an emphasis on Japan and Europe (Thornton,
2001). After the firm lost $180 million on retail operations in Japan and Europe under the old
regime, O‘Neal‘s strategy to expand banking services including CDOs was meant to close this
gap. When discussing a possible solution, he was quoted saying, ―spending more money on a
flawed business model will not fix the fundamental problem‖ (Thornton, 2011, para. 29).
O‘Neal‘s aggressive and competitive action plan for fixing Merrill Lynch included building
profits, narrowing the firm‘s focus, and cutting costs.
The Wrong Solution
Again, a significant part of executing O‘Neal‘s turnaround of Merrill Lynch was to be
accomplished through the use of CDOs. Pools of mortgages were purchased and bundled into
CDOs and sold to investors. The executives who created the securities were not permitted to buy
much of their own product so their pay was calculated by the short term revenues they generated

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for the company (Bernstein & Eisenger, 2010). These securities consisted of large bundles of
subprime mortgages (mortgages sold to those who could not afford them) that were created in-
house, eventually becoming the favored and wrong solution to fix Merrill Lynch.
In an effort to achieve O‘Neal‘s competitive action plan to build profits and fix Merrill
Lynch, a team of bankers were assembled in 2006 for the sole purpose of acquiring the widely
unpopular mortgage–backed securities Merrill Lynch was creating, largely as a result of
unwilling traders and AIG‘s refusal to buy the ―super–senior‖ assets (Bernstein & Eisernger,
2010). This new in-house group was paid to take on Merrill Lynch‘s losing mortgage securities,
which quickly earned them the label of ―million for a billion‖ club (Bernstein & Eisenger, 2010).
Simply put, the group was compensated for how much risk they took and not for how much
money they generated. According to internal risk reports, a month before the group was formed,
Merrill held $7.2 billion worth of these assets, which skyrocketed to $37 billion in 2007
(Bernstein & Eisenger, 2010). An individual who worked in the group was quoted as saying,
―We were managing and booking risk that was already in the firm and couldn‘t be sold‖
(Bernstein & Eisenger, 2010, para. 13). Again, the group was solely responsible for the
warehousing of the super–senior risk (Bernstein & Eisenger, 2010). In the end, tens of billions of
dollars in toxic assets in the form of subprime mortgages were accepted with disastrous results,
drastically decreasing the value of Merrill Lynch securities (Bernstein & Eisenger, 2010).
2007: The Year of the Bear
The first quarter of 2007 produced another earnings record allowing Merrill Lynch to
finally beat Lehman Brothers, Goldman Sachs, and Bear Stearns in profit growth (Morgenson,
2008). However, as the year progressed, investment banks experienced significant declines in
profit margins due to questionable subprime mortgages and the CDO business began to fall apart.
Rather than slowing down after AIG‘s refusal to insure the firm‘s CDO business, Merrill Lynch
became the world‘s biggest underwriter of these products (Morgenson, 2008). O‘Neal exhausted
all options to insure the company‘s risky CDO business both externally and internally. Between
2005 and 2007, the company went on a buying spree of 12 major purchases of residential and
commercial mortgage–related companies or assets with the intention of generating in-house
mortgages that could allow the internal team to package and sell the CDOs. Additionally, the
company bought commercial properties in South Korea, Germany, and Britain, a loan servicing

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operation in Italy, and a mortgage lender in Britain, but largest acquisition was First Franklin, a
domestic subprime lender (Morgenson, 2008).
As the U.S. housing market tanked, Merrill Lynch‘s share price dropped 21% in October
of 2007 (Moore, 2007). O‘Neal attempted to reassure the public by stating the financial crisis
was ―reasonably well contained,‖ however, a few months later Merrill Lynch reported a $2
billion loss--the largest loss in the firm‘s history--as result of its controversial mortgage practices
(Hightower, 2008, para. 2). Thus, the risks placed on these subprime mortage securities began to
take its now predictable toll on Merrill Lynch. The people with terrible credit who had purchased
these homes, predictably defaulted on their mortgage payments, and those whose profits
depended on these mortgages being payed, tanked as did the CDO business.
Yes Men
O‘Neal‘s reliance on employees and people he liked, instead of qualified and proven
candidates is what many who were involved with Merrill Lynch attribute to its downfall. Among
these men that O'Neal liked, but were not qualified to serve in their respective positons were
Ahmass Fakahany, Osman Semerci, and Dow Kim.
According to authors Bethany McLean and Joe Nocera,
[Fakahany] had spent his career on the administrative side of Merrill, overseeing such
functions as human resources and computer systems, he wielded outsize power because
he was indisputably the one executive who was close to O‘Neal. ―Fakahany was the one
guy who could go into Stan‘s office, close the door, and say, ‗Can you believe . . . ?‘ ‖
says a former executive. He had worked in the Merrill finance office when O‘Neal had
been C.F.O., and had essentially hitched his wagon to O‘Neal‘s pony. (McLean & Nocera,
2010, para. 27)
O'Neal appointed Fakahany as co-president which included overseeing the internal CDO
team, and credit and risk management. Thus, O'Neal appointed a man with no prior knowledge
of the securities industry to serve as co-president and head of the risk department. This reveals
O‘Neal‘s thought process in whom he chose to associate and why as O'Neal appointed Merrill
Lynch executives based on who listened to him and who he liked instead of those who were best
for Merrill Lynch's success. This favoritism is ironic because O'Neal's personal agenda as head
of Merrill Lynch was to root out the "Mother Merrill" culture that had consistently displayed
favoritism in the past (Robertson & Sullivan, 2009).

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Stan O'Neal also showed his favortism towards Dow Kim and Osman Semerci. Kim
headed all of Merrill Lynch‘s fixed-income businesses. O'Neal kept Kim close to him because
Kim carried out O'Neal's orders without question. One such example is manifested in who Kim
wanted to retain as top traders and who he wanted to bring in. O'Neal consistently hounded Kim
about not making as much fixed-income revenue as Lehman Brothers or Goldman Sachs,
pressuring him to have his team of traders create CDO packages as fast as possible, and to sell
them as fast as possible. Instead of listening to and promoting one of his most experienced and
effective traders, Jeff Kronthal, Kim fixed his eyes on the young and aggressive CDO trader,
Chris Ricciardi. As Ricciardi amped up the CDO business, Kronthal and other veteran traders
warned Kim of the negative impact Ricciardi and like-minded traders would have on Merrill
Lynch. However, since O'Neal would not stray from the CDO business and rid Merrill of anyone
that posed opposition, Kim fired Kronthal and kept on Ricciardi. "Kim thought Merrill needed
10 more salesmen just like [Ricciardi, because] he was the kind of trader O‘Neal wanted at
Merrill Lynch" (McLean & Nocera, 2010, para. 20).
After Ricciardi voluntarily left Merrill Lynch, O'Neal and his loyal followers, Kim and
Fakahany, searched for someone to replace Ricciardi who shared his aggressiveness in the CDO
business. They then found Osman Semerci.
O‘Neal was quickly persuaded to bring him to New York and give him a title—global
head of fixed-income, currencies, and commodities…. Semerci, a 39-year-old British
citizen of Turkish descent, had a reputation for being extremely driven and extremely
aggressive—the traits O‘Neal wanted on the trading desks. Semerci wouldn‘t be afraid to
take big risks to generate big profits. (McLean & Nocera, 2010, para. 25)
O'Neal, Fakahany, and Kim, who collectively knew very little about the trading and
financial business, brought on Semerci because he would listen to them and aggressively attack
the CDO market, despite the warnings of Kronthal and others not to rely so heavily upon CDOs.
Semerci, Fahanky, and Kim were used to replicate the model O‘Neal had seen made so
successful by Lehman Brothers and Goldman Sachs. This was O'Neal's tunnel vision and anyone
who questioned him would be aggressively ousted. Thus, O‘Neal surrounded himself with yes-
men executives who supported his thoughts and decisions without question.

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The End is Nigh
In 2007, O'Neal began to see the writing on the wall and knew he and Merrill Lynch
needed an out to save them from their increasing losses. O'Neal began to look to outside sources
to save his firm. O‘Neal preferred to make decisions autonomously with little input from others
sources. This approach had a significant effect on his decision making. But, he was slow to take
action to save the firm because of his disconnect with the board and the gravity of the situation
he faced (Hoel, Glaso, Hetland, Cooper, & Einarsen, 2010).
O'Neal, liking to make decisions autonomously, asked one of his employees with whom
he was not close, to consult Wachovia Bank and see if they would have an interest in a merger
with Merrill Lynch. Later, the Merrill Lynch‘s Board discovered O'Neal's dealings with
Wachovia Bank and argued that Merrill Lynch did not need saving and that by him reaching out
to Wachovia Bank in the interest of merging would tarnish Merrill Lynch's image. O'Neal
countered that he had been through a similar situation before and knew merging would be what
would save the company. Board members rebutted that Merrill Lynch was a great franchise and
one solid as Coca-Cola (Olster & Farrell, 2010).
Although seeking a merger partner may have been of sound reasoning, O'Neal's merger
propositions included a separation package of $250 million if O'Neal was not appointed to lead
the newly merged firm. After the board discovered these details, they forced O'Neal out and he
"retired" (Duke, 2007; NPR, 2007). As an eventual result, O‘Neal‘s inability to persuade his
board to take action in 2007 and merge with another company would cost shareholders $50
billion (Hoel et al. 2010).
‘Cuz’
Stan O‘Neal explained his decision making process after the fact, stating ―a larger
consumer base as part of the financing base, and beginning to change the character of not only
the balance sheet, but also the composition of business at Merrill was something I would have
liked to have done strategically‖ (Cohan, 2010, para. 3). Since a majority of O‘Neal‘s pay was
tied to Merrill Lynch‘s short term performance, he was encouraged to take short term risks. As a
result, his intentions to expand Merrill Lynch‘s presence into new and riskier ventures resulted in
more risk but higher compensation. When questioned about whether he thought he delegated too
much risk, he replied, ―I can't really say. Also, I never stopped looking at the risk reports. It turns
out they didn't properly capture the nature of the risk‖ (Cohan, 2010, para. 1).

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Analyses
Decision Making Tools
O‘Neal acknowledged he was unaware of the complexity of the challenges faced by
Merrill Lynch as result of uncomprehensive data tools. Using a strategic decision making process
while simultaneously incorporating tools, such as data warehousing capabilities, contribute to the
flow of information and better informed decisions. Data warehousing capabilities is a five stage
process that provides organizational decision support with reporting, analysis, prediction,
operations, and disintermediation (Saporito, 2001). Stage one refers to reporting from a single
source of truth within the organization into a single repository that drives decision making across
all functions creating a cohesive foundation (Saporito, 2001). The second stage involves asking
questions in an interactive environment beyond the numbers. The third stage requires
management to leverage this information to forecast what could happen. The fourth stage
analyzes what is happening and provides continuous updates for day-to-day activities. The last
stage involves operational aspects of decision support that encourage interactive customer
relationship management in real time. Data warehousing is meant to increase the speed and
accuracy of business decisions.
Inquiry and Advocacy
Western leaders are trained to present and argue strongly for their views, but as they rise
in an organization they are forced to address complex and interdependent issues where one of the
only viable options is for groups of informed and committed individuals to think together to
arrive at effective solutions (Senge, Roberts, Ross, Bryan, & Kleiner, 1994). Executive level
positions require a skillful balance of inquiry and advocacy using reasoning and thinking while
encouraging others to challenge those views. This process allows for leaders to change a
company from within when senior management opens up and is willing to share information. In
using this approach, O‘Neal would have promoted a team of shared authority and increased
intimacy. O'Neal was ultimately responsible to dissolve barriers and reinvent relationships
among his senior team. This work requires deep reflections into fundamental beliefs about self,
work and power, while changing carefully guarded structures of the organization that deal with
compensation and promotion (Senge et al. 1994). O‘Neal attempted to make these large scale

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changes in a short time frame without an adequate foundation of addressing the two levers of
shared authority and intimacy from the top of the company (Senge et al. 1994).
Status Anxiety
The former CEO‘s ascension of the corporate ladder from humble beginnings earned him
the respect of his colleagues but contributed to status anxiety displayed in his relationships with
senior leaders of the firm. When an individual begins to achieve success and recognition in his
work, he comes to a realization that a change has occurred within himself and in his relationships
with associates (Zaleznick, 1963). The individual is subsequently viewed as a contender and
peers become cautious, distant, and constrained in their approach (Zaleznick, 1963). Those that
were once mentors become competition, as was the case for O‘Neal. Another side to the
dilemma of status anxiety is the need of executive subordinates to be near the source of power
and to be accepted and understood (Zaleznick, 1963). Under these conditions, communication
breaks down. The sense of loneliness an executive experiences is derived from the feeling that he
is the target for the aggression of others (Zaleznick, 1963).
O‘Neal had a reputation for being aggressive, aloof, and autocratic. His style of
leadership was perceived as bullying behavior (Hoel et al. 2010). Bullying is associated with
ongoing negative relationships where targets strongly resent the received treatment, viewing it as
systematic, ongoing, and being unable to defend themselves against it (Hoel et al. 2010). Former
executive vice-president and chairman, Win Smith of Merrill Lynch, commented on O‘Neal‘s
approach saying, ―what he did that made many of us non-supportive was to publicly castigate
Mother Merrill without understanding what Mother Merrill stood for‖ (Bartiromo, 2007, para. 2).
Behaviors involved with bullying may be subtle or difficult to recognize. O‘Neal‘s conflict
management style was a reflection of these behaviors. His organizational changes were
accomplished by forcing others to comply. Although described as intense and reserved, his
disconnection with the underlying challenges being faced by the company were apparent.
Coupled with O‘Neal‘s autocratic leadership approach, the breakdown in senior management
was predictable.
Conflict Management
O‘Neal‘s aggressive approach indicates an interactionist view of conflict (Zaleznick,
1963). His behaviors encouraged conflict within the company that was intended to lead to

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change and innovation. However, promotion of conflict without strong conflict management
skills and organizational norms that promote fair fights led to organizational dysfunction. Poor
conflict management let to O‘Neal‘s alienation, loss of ability to communicate with subordinates
and the board, and his eventual resignation.
It is challenging to maintain allies while in a position of power. The loss of allies can take
place in power conflicts that stem from personal integrity, friendship, loyalty, jealousy, egotism,
and hopes of prestige and recognition (Zaleznick, 1963). A source of dilemmas that leaders face
can be found within themselves. Executives must be able to resolve their inner conflicts so that
their actions are strongly grounded in reality, and that the leader does not find himself constantly
making or not making decisions to the disservice and confusion of subordinates (Zaleznick,
1963). When an executive finds himself immobilized by conflict, he will seek outsiders for an
explanation. He may hesitate to try and resolve the conflict within the firm because he feels
subordinates are holding out by providing too little information, stating confused positions, and
giving mixed signals (Zaleznick, 1963). In order to effectively resolve such a situation, an
executive must retain trusted board allies through garnering mutual trust.
Such trust was not established between Stan O‘Neal, his board, and subordinates. In 2007,
O‘Neal knew he had run out of options and needed to sell Merrill Lynch to save the company.
To go through with the selling Merrill Lynch, the idea needed to be presented to, and then
approved by the board. However, due to unresolved conflict with board members, he was unable
to strategically communicate with the executive team the reasons why they needed to sell.
Life after O’Neal: Déjà vu All Over Again
Despite Merrill Lynch‘s reports of the largest–ever quarterly loss--$8.4 billion for the
third quarter of 2007, O‘Neal still left the company with $161.5 million in stock, options, and
retirement benefits, and an office and executive assistant for up to three years (Associated Press,
2007). Merrill Lynch‘s record loss and O‘Neal‘s resignation were signs that the misuse of CDOs
had reached its climax and that someone in senior leadership was going to pay for it. Lehman
Brothers analyst Roger Freeman commented on the meaning of the resignation and transition
stating, ―Just because there's a change in the CEO doesn't change the challenges Merrill Lynch
faces. This could be a slow death spiral for these securities‖ (Ellis, 2007, para. 6). O‘Neal‘s
successor, John Thain came from Goldman Sachs and promised that as the new CEO of Merrill

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Lynch he would live up to his reputation as ―Mr. Fix It‖ (Robertson, 2009). Merrill Lynch was so
committed to securing Thain that the company paid him $15 million as a signing bonus.
However, after attempting to balance major problems within the company in 2008, and
the fates of hundreds of Merrill Lynch employees, the company reported a $10 billion loss
(Robertson, 2009). Additionally, in an executive hiring move similar to O‘Neal, Thain hired a
new Chief Financial Officer with no experience in a securities firm. Thain eventually pushed
through executive bonuses totaling $3.6 billion causing investors to lose complete confidence in
the firm (Robertson, 2009). In September of 2008 and one month after the extravagant bonus
payouts, Merrill Lynch was sold to Bank of America. The John Thain experiment had failed.
However, Thain was somewhat successful in fixing the broken Merrill Lynch, and
managed to sell over $30 billion of repackaged debt securities, but this was not enough to undo
what had been done in creating even more billions worth of dollars of mortgage backed
securities. Thain was unable to face the reality that his reputation of ―Mr. Fix It" would be
inapplicable to this situation, and Thain was he was forced out in January 2009 after the Bank of
America acquisition (Gasparino, 2008). The acquisition was completed and officially approved
by Bank of America shareholders only after the U.S. government provided $138 million in
assistance (Robertson, 2009).
Merrill Lynch is still suffering from the aftermath of the failed CDO business. Charges
were brought in 2013 by the Securities and Exchange Commission that Merrill Lynch misled
investors about CDOs and concluded that Merrill Lynch kept ―inaccurate books‖ while
outsourcing the risk prior to the financial crisis. In a statement made by George S. Canellos, co-
director of the SEC's Division of Enforcement:
Merrill Lynch marketed complex CDO investments using misleading materials that
portrayed an independent process for collateral selection that was in the best interests of
long-term debt investors. Investors did not have the benefit of knowing that a prominent
hedge fund firm with its own interests was heavily involved behind the scenes in
selecting the underlying portfolios. (Yu, 2013, para. 3)
The company was forced to pay $131.8 million in penalties without admitting or denying the
SEC‘s findings. Merrill Lynch also agreed to a censure and must cease and desist from future
violations of specific sections of the Securities Act and Securities Exchange Act pertaining to
CDOs (―SEC Charges‖, 2013).

41 | P a g e
The 2008 Financial Crisis
The shock of the global financial crisis of 2008 was epic. In 2005, $178 billion was
issued in mortgage and other asset–backed CDOs and this number rose to $316 billion in 2006
(Morgenson, 2008). In addition to Merrill Lynch, the list of giant financial institutions that were
most involved in the CBO game included Lehman Brothers, AIG, Freddie Mac, Fannie Mae,
HBOS, Bradford & Bingly, Royal Bank of Scotland, Fortes, Alliance & Leicister, and Hypo
(Mathiason, 2008).
Commentators note that the market instability of the 2008 financial crisis was caused by
many factors, but one of the most prominent and impactful was the decision making process
behind the use of CDOs (Guina, n.d.). As a result of the mismanagement of these instruments,
financial institutions were saddled with mortgaged backed assets that decreased in value and
dried up their cash reserves, further restricting their ability to make new loans (Guina, n.d.). The
impact on the financial industry was catastrophic and echoed throughout the global economy.
This created a banking crisis and a domino effect endangering the entire economic system as
credit dried up (Guina, n.d.).
Simon Johnson, former chief economist for the International Monetary Fund offers his
perspective on the future of large financial institutions (superbanks) said:
The superbanks were sort of exercises in empire building and aggrandizement of the
CEOs. There are people who say the main job of the CEO is actually lobbyist, because
the CEOs can't control these banks anymore. Nobody understands the risks that they've
taken on in these kinds of global businesses and their very complicated derivative
businesses, for example. I think actually it's self-evident that nobody understood those
businesses, because they couldn't have messed up in this way if they had. So the
superbanks I think are finished, should be finished. They're not very efficient, they're
politically way too powerful, and they should be broken up and go into decline. Whether
they will or not depends on the success of their CEOs in terms of their political lobbying.
So that, I think, is where the struggle is right now. (―The Future‖, 2009, para. 11)
Concluding Remarks
The intentions of weeding out the Mother Merrill culture, cutting costs, and preserving
Merrill Lynch as an independent company were noble. But, O‘Neal‘s approach to leadership,
conflict management, and decision making had a widespread negative impact on both Merrill

42 | P a g e
Lynch and the entire economy. His focus on CDOs and the reward systems at Merrill Lynch
encouraging aggressive short term gains without understand the instruments‘ inherent risks.
Moreover, his blatant favoritism led to less collaboration and engagement in the company‘s
executive ranks.
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