New Merrill Lynch CEO must gain investor trust

NEW YORK (AP) — No matter who is running Merrill Lynch & Co., it’s going to need a regimen of restraint and recuperation after getting badly bruised by the global credit market shakeout.

The world’s largest brokerage took a $7.9 billion writedown for subprime mortgages and asset-backed bonds whose values went sour. Many on Wall Street believe there’s more where that came from — maybe an additional $4 billion — and Merrill’s leadership will need to reduce risk and rebuild morale among its ranks.

Stan O’Neal — who led Merrill Lynch to its biggest loss since being founded 93-years ago — is reported to be in the midst of finishing the terms for his departure. Once that’s completed, it is widely expected the 11-member board will reach out to BlackRock Inc. Chief Executive Laurence Fink for the job.

A person familiar with the matter who was not authorized to speak publicly said Fink had yet to be approached by Merrill’s board — and BlackRock’s own directors have yet to call a meeting. Merrill declined to comment.

Fink — or whoever is named to lead Merrill Lynch — will have to immediately roll up his or her sleeves.

“It’s a very bad situation to walk into because all the shoes have yet to drop,” said David Easthope, a senior analyst with financial services consultant Celent. “They don’t know the full losses yet, and they still have to go out and win support for their agenda and vision.”

There are reports that Merrill Lynch could write down an additional $4 billion in value of asset-backed securities and other complex financial instruments in the fourth quarter. It could lead to the second-straight loss after Merrill went into the red by $2.4 billion during the third quarter.

The new CEO would have to make sense out of Merrill’s investment portfolio, and immediately begin to scale back risk while avoiding any kind of fire sale of securities stuck on its books that few investors appear to want now. That could become tricky as a some of its investments — collateralized debt obligations — combine slices of different kinds of debt into a single security.

It will not be easy to sift through the CDOs, considering the value of these securities have dropped significantly since the summer’s credit turmoil. The drop in the fixed-income markets led Merrill Lynch to at first estimate its writedown at $4.5 billion on Oct. 5 — some 76 percent lower than what the brokerage finally reported.

Michael Mayo, a Deutsche Bank analyst who lambasted Merrill Lynch’s management during a conference call about the earnings miss, said the new chief executive would face three tasks after taking over: “Get the numbers right, gain credibility and trust with investors, and fix [the] lack of risk controls while not hurting the 7/8ths of the company that is performing well.”