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Posted by on Oct 15, 2010

Call It Leadership If You Want To, But . . .

The November, 2010 issue of Vanity Fair offers a fascinating and in-depth, if depressing, insight into the world of Merrill Lynch’s leadership before and during the financial crisis, when Stanley O’Neal was at the helm.

The piece, “The Man Who Blew Merrill Lynch’s Billions,” by Bethany McLean and Joe Nocera truly reads like an archetypal fairy tale, or myth. Perhaps Greek drama is a better characterization. It’s all here in the story — all the elements of leadership that run an organization into the ground. (See the summary at the end of this blog.)

O’Neal joined Merrill in 1986 as a junk bond trader. He quickly worked his way up, impressing his superiors in each position as a top performer – and one who could be ruthless in chasing the performance imperative. The authors write that he was
“proud, prickly, intolerant of dissent and quick to take offense at perceived slights.”
Within 16 years, he was CEO.

Once he got the top job, he immediately pushed aside those he had competed with to get there. But he went further. The article authors write, “O’Neal had been insular before; he was the kind of man who liked to play golf by himself. Now he became isolated. He had been wary; now he became suspicious of everyone around him. Patrick and Zakaria (two officials) had been extremely competent executives; he replaced them with more pliable lieutenants.”

Other executive mirrored this; they were vindictive, surrounding themselves with a small group of those who would only say “yes” — a process that ultimately had catastrophic results. He once said, “You don’t understand. Dysfunction is good on Wall Street.”

During this time, O’Neal developed a fixation with Goldman Sachs, the money printing press that quarter after quarter was churning out enormous profits. O’Neal’s jealousy was such that one executive commented that you did not want to be in O’Neal’s office the day Goldman released its financial results.

Beyond the differences in financial performance, there were others. The authors write, “O’Neal insisted that the company’s executives speak only to him about their businesses and not with one another. The Goldman brass insisted on knowing bad news; Merrill executives trembled at the thought of giving O’Neal bad news. O’Neal rarely asked for input when making a decision. And under no circumstances did he want to be challenged once he had made up his mind.”

Some basic economics: One hugely important strategic decision O’Neal made was to not only sell, but also own, collateralized debt obligations (CDOs). CDOs are one example of those derivatives that precipitated the U.S. financial crisis. They are essentially your mortgage, mine, others’ car loans and other forms of debt all bundled together and resold to investors who like the stream of income as debt is repaid.

The only problem is that when individuals cannot make the debt payments, the system comes unhinged. Since the credit rating agencies gave top marks to any CDOs with a pulse – even when they were shaky – they were freely bought and sold with Triple A confidence, until the music stopped. In reality, many of the debts in these CDOs were perilous, and O’Neal kept pushing for Merrill to embrace higher coupons – Wall Street parlance for increasingly risky debt instruments. Merrill had grown up as a nice, stable stockbroker, selling shares to middle America, but as it embraced CDOs to increase profits, it was in a new game, with all new risks.

This rush to CDOs was propelled by O’Neal’s envy of Goldman profits, and woe to the man or woman who warned of the risks as Merrill’s profits, too, rose. In fact, O’Neal’s force of temper meant that no one would tell the truth, even as the first explosions in the debt market began happening. Executives downplayed the risk Merrill faced (remember, it now owned, not just sold, the debt), saying the earliest market tremors would blow over, and the little “rough patch” would end. One internal estimate from the O’Neal clones of Merrill’s exposure at $83 million came to be known within the firm as “The Fantastic Lie.”

But as you know, the facts have an inconvenient way of not going away. As it became increasingly clear that the financial system was encountering systemic disruption, firms’ positions were flushed out. The $83 million lie ballooned to $6 billion. Just like that.

At this point, it is an entirely fair question to ask why, when you keep track of a few dollars error in your checking account, a company can mistake nearly $6 billion.

You actually already know the answer. The authors write. “Always a loner, he had become isolated from his own firm. He had no idea that key risk managers had been pushed aside or that people he had put in important positions were out of their depth. Amazing as it sounds, the CEO of Merrill Lynch really didn’t have a clue.” They also write that as Goldman executives were cancelling vacations, O’Neal played golf by himself.

The rest is history. The reality became undeniable, and O’Neal – almost overnight – went from the arrogant, resentful, irritated defender of Merrill to a shell-shocked shadow of his former self. There was no way out. Except out, with $161 million in retirement benefits as Bank of America bought Merrill.

When he was later hauled up before Congress, mostly to defend his retirement package, the authors write that he spent his time “dwelling on the mistakes of the men he had surrounded himself with, mostly blaming others for his downfall.”

So what’s the message? Here is the O’Neal Leadership Playbook, for your consideration:

 Don’t let people communicate freely with each other

 Keep an enemies list, and get rid of them

 Make sure people know you can’t stand to hear contrary information

 Operate out of competitive jealousy

 Tear up the strategy

 Be emotionally volatile

 Isolate yourself

 Blame everyone else


  1. Great post. Larry Bossidy (very successful former CEO of Allied Signal and Honeywell) states in his book “Execution” that an effective execution culture (and progressive mindsets) must have “truth over harmony”. O’Neal’s approach and subsequent repercussions reinforce what happens when you have neither.

    • Jim, thanks for your post. There are probably a few ways to look at this issue of truth and harmony. Some would say they are polarities (more on this later), others would argue there is a means-end thing happening here (e.g., you can’t get to the truth without harmony – something will get compromised – or you can’t have real harmony without truth – it’s a false front). I agree that Merrill had neither, so it’s the worst of all worlds.

      I also agree that action not based on truth is a waste of time, and that is probably the intent behind Bossidy’s comment. We might all feel good about each other, but if it means not acknowledging the business is failing we have a big problem.

      The most important thing to me is that there does not have to be a trade-off. That it is perceived that way speaks to the unconscious contents of those who prefer Thinking or Feeling (as defined in the Myers-Briggs Type Indicator). By that, I mean that Thinkers sometimes have an unconscious need to “diss” Feeling. They talk about Kumbaya or holding hands in a disparaging, eye-rolling way. If it were merely different, they would probably just say, “Oh, that’s different,” in a more neutral way. Nothing would be at stake. The fact that it is belittled reveals some energy charge behind the discomfort. In the same way, Feelers often attack Thinkers as insensitive or emotionally clueless. Again, the attack reveals something that may be missing, or is unconscious.

      I believe that much of adult life is about discovering what got left behind in personality formation. As we come to a sense of our identity, some parts come front-and-center, and other parts recede into unconsciousness. When we see those forgotten parts modeled, I believe that at some unknown level, they remind us of what we don’t do.

      To be specific, Feelers may actually be threatened by Thinkers who simply state what appears to be the truth without holding back. Thinkers may feel threatened by the way of being of Feelers.

      All these reaction and emotions are signals, and much of the work is in noticing our own reactions to things and becoming curious about those. These clues can lead to self-discovery if we are open to the path. Midlife is the classic time in which – after a lot of exploration, or perhaps a crisis – Thinkers suddenly discover the importance of relationships, or Feelers take new steps to say what needs to be said, even at the cost of hurt feelings.

      But all of this is still a journey, not an end. As we engage the opposite end of the polarity, we are moving to what Carl Jung called individuation, or wholeness. This a more adaptive, resilient and multi-dimensional self, able to deal with the demands of the world in a more complete way. It is the opposite of the old saw (excuse the pun): “I have a hammer so every problem must be a nail.”

      If any of this sounds too abstract or “out there,” let me ground it in a real example. I interact regularly with the faculty of the Georgetown Leadership Coaching Program. These folks are among the most developed I have ever had the privilege of working with. What I notice in conversations, debate and communication is that they pursue the truth, and they do it in a way that respects and upholds relationships. They routinely model integration of opposites. They walk the talk of so much of leadership development.

      It doesn’t have to be an either/or (or in Merrill’s case, neither).

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