Merrill Lynch cuts its losses, and its CEO

NEW YORK -- As expected, O'Neal resigned Tuesday, less than a week after admitting that he had underestimated the firm's losses in the subprime mortgage market.

But what might have come as a surprise is that rather than name a successor, Merrill's board of directors elected Alberto Cribiore as interim non-executive chairman and asked him to form a search committee to identify the firm's next CEO. Meanwhile, two of O'Neal's key lieutenants — Ahmass Fakahany and Gregory Fleming — will continue to run the company on a day-to-day basis as co-presidents.

So Merrill is searching for a new leader while its future as the nation's premier stock-brokerage firm is at stake. It is arguably at its most important crossroads in a generation, as losses from the imploding subprime mortgage market blew a hole in its earnings, eroded faith in a firm that until recently was a shining success and sent its stock price to a two-year low.

A good part of the shine came off Merrill's reputation last week when it announced the largest quarterly loss in its history. The primary cause was a write-down of $7.9 billion in the area of collateralized debt obligations (CDOs) and subprime mortgages. To make matters worse, just weeks earlier, Merrill had announced the write-down would be $4.5 billion. The sudden increase in the write-off suggested that Merrill, which still has $20 billion in exposure to the subprime mortgage sector, didn't have a handle on the depth of its financial problems.

When it comes to write-downs and special charges, investors prefer to see companies digest their problems at once and move on. That's why Merrill's double-clutch this month spooked investors — and why there is so much concern about who will lead the firm out of this crisis.

"That's as high a number I've seen," says Eric Fitzwater, analyst at SNL Financial. "It's still a distinct possibility that Merrill may have to take additional write-downs."

The fluctuating write-down was a sign that the problems at Merrill went beyond the factors that have been hurting the investment banking industry, says Mark Lane, analyst at William Blair. "In most people's eyes, this is a management issue, a risk-management issue, and a large enough number, looking at past history, to prompt a lot of management change," he says.