Daniel Tully, who tripled Merrill Lynch & Co's stock price during his tenure as chief executive officer in the 1990s, said the firm should rein in risk-taking after a record third-quarter loss he described as "sickening."
Tully, who served as chairman for four years before retiring a decade ago, said in an interview on Saturday that he has spoken with current and former employees of New York-based Merrill who share his views. He declined to comment on whether CEO Stan O'Neal should be replaced, saying the board must decide.
"With the help of God this too shall pass and the firm will continue to do extraordinarily well, but without the excessive risk that apparently was taken," Tully, 75, said in a telephone interview from his home in Florida. "This company is bigger than any one of us, and it is a tremendous franchise."
Merrill last week disclosed US$8.4 billion of writedowns on loans and mortgage-linked bonds, leading to the biggest quarterly loss of its 93-year history.
O'Neal, 56, is facing pressure to resign as investors, angered by a 29 percent drop in the stock price this year, question his ability to police risks. Merrill directors met on Friday to discuss his potential departure, the Wall Street Journal reported.
The third-quarter net loss of US$2.24 billion, or US$2.82 a share, was six times bigger than the firm forecast just three weeks earlier.
Merrill's shares have fallen the most of the five biggest US securities firms. All of them have dropped except Goldman Sachs Group Inc, the largest and most profitable.
"I've been in touch with many, many of our fellow employees and ex-employees and they're sick, everyone is sick about it, as I am too," Tully said. "It's awful. You hate like hell to see the firm, the headlines in the New York Times and Barron's today [on Saturday]. It's sickening."
Tully, who started out as a stockbroker and spent four decades helping build Merrill into what is now the third-biggest US securities firm by market value, faced mortgage-related losses along the way.
In 1987, when he was president and chief operating officer, one of the firm's mortgage traders was accused of unauthorized transactions that led to a US$377 million loss.
That figure "kind of pales by comparison" to Merrill's third-quarter writedowns, said Tully, who served as CEO from 1992 through 1996. "We had a situation which at that time was really god-awful, and this is a multiple of that."
Tully retired as chairman in 1997. His successor, David Komansky, 68, served as CEO until December 2002, when O'Neal took over.
Tully said he didn't think Merrill should sell itself to a larger bank while the stock is trading at a depressed price. Selling assets in a "fire sale" would also be a mistake, he said.
O'Neal said in a conference call on Wednesday that he would consider divesting "non-core assets," without being specific. Merrill's holdings include a 49.8 percent stake in money manager BlackRock Inc and a passive, 20 percent stake in Bloomberg LP, the parent of Bloomberg News.
The New York Times reported on Wednesday that O'Neal initiated talks about a possible merger with the Charlotte, North Carolina-based bank Wachovia Corp prior to broaching the matter with the board. Merrill Lynch officials declined to comment on the reports.
Tully said he didn't have firsthand knowledge of any such talks.
"You sure as hell don't want to sell something on a bailout," he said. "And if you were thinking of that, you would sure as hell discuss it with the finance committee and the entire board" in advance.
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