Merrill Lynch under CEO Stan O’Neal (2002)
HEXAGRAM 44 – Kou – Coming to Meet
Above CH’IEN THE CREATIVE, HEAVEN
Below SUN THE GENTLE, WIND
This hexagram indicates a situation in which the principle of darkness, after having been eliminated, furtively and unexpectedly obtrudes again from within and below. Of its own accord the female principle comes to meet the male. It is an unfavorable and dangerous situation, and we must understand and promptly prevent the possible consequences.
The hexagram is linked with the fifth month [June-July], because at the summer solstice the principle of darkness gradually becomes ascendant again.
THE JUDGMENT
COMING TO MEET.
The maiden is powerful.
One should not marry such a maiden.
The rise of the inferior element is pictured here in the image of a bold girl who lightly surrenders herself and thus seizes power.
Commentaries:
Indeed O’Neal was bold. Bold, mean and vindictive. Bold with someone else’s money – the customers’ and the shareholders’ He leveraged the corporation to the unbelievable ratio of 30:1 and placed it at risk for $65 billion. Vindictive because if you held an opinion different than his, he would fire you. He only wanted brown noses around him.
This would not be possible if the strong and light-giving element had not in turn come halfway.
Commentaries:
He did approach the BOD but the BOD also approached him. Thus they met him halfway.
The inferior thing seems so harmless and inviting that a man delights in it; it looks so small and weak that he imagines he may dally with it and come to no harm.
Commentaries:
Merrill’s BOD fell for his harmless looks. Did they know he was full of hate and resentment? What made them so sure they could dally with him and come to no harm?
The inferior man rises only because the superior man does not regard him as dangerous and so lends him power. If he were resisted from the first, he could never gain influence.
Commentaries:
All evil sons of bitches come to power (Hitler) precisely because those who should know better do not regard them as dangerous and lend them power. A simple act of resistance at first would keep them away from power and the world would avoid the future destruction they always bring.
The time of COMING TO MEET is important in still another way. Although as a general rule the weak should not come to meet the strong, there are times when this has great significance. When heaven and earth come to meet each other, all creatures prosper; when a prince and his official come to meet each other, the world is put in order. It is necessary for elements predestined to be joined and mutually dependent to come to meet one another halfway. But the coming together must be free of dishonest ulterior motives, otherwise harm will result.
THE IMAGE
Under heaven, wind: The image Of COMING TO MEET.
Thus does the prince act when disseminating his commands
And proclaiming them to the four quarters of heaven.
The situation here resembles that in hexagram 20, Kuan, CONTEMPLATION (VIEW). In the latter the wind blows over the earth, here it blows under heaven; in both cases it goes everywhere. There the wind is on the earth and symbolizes the ruler taking note of the conditions in his kingdom; here the wind blows from above and symbolizes the influence exercised by the ruler through his commands. Heaven is far from the things of earth, but it sets them in motion by means of the wind. The ruler is far from his people, but he sets them in motion by means of his commands and decrees.
THE LINES
Six at the beginning means:
It must be checked with a brake of bronze.
Perseverance brings good fortune.
If one lets it take its course, one experiences misfortune.
Even a lean pig has it in him to rage around.
Commentaries:
· Why choose a CEO who must be checked with a brake of bronze.?
· And that the only way to bring good fortune to the corporation is to persevere in checking him with a brake of bronze.?was this a warning to the BOD that they had to make sure he did not do away the risk management division?
· What can shareholders, employees and customers gain from electing a CEO whoIf one lets it take its course, one experiences misfortune. ?
· If an inferior element has wormed its way in, it must be energetically checked at once.
· By consistently checking it, bad effects can be avoided.
· If it is allowed to take its course, misfortune is bound to result;
· the insignificance of that which creeps in should not be a temptation to underrate it.
· A pig that is still young and lean cannot rage around much, but after it has eaten its fill and become strong, its true nature comes out if it has not previously been curbed.
O’NEAL AS THE INFERIOR ELEMENT
In 2002, the I Ching already knew he was an inferior element not worthy of his position and so described him in its ancient language. It does not require of genius to interpret the I Ching’s ancient language.
What made of O’Neal an inferior element?
· While the Superior CEO asks for the bad news first, O’Neal’s “abrasive” personality and plain mean attitude was so menacing that no one would dare bring him any bad news.
· While the Superior CEO is humble, O’Neal introduced the practice of having the security guards always hold an entire elevator bank open exclusively for him.
· While the Superior CEO encourages merit, O’Neal promoted loyalists like Osman Semerci, who shared his vision. He was only imitating the BOD which had elected him without merits.
· While the Superior CEO listens closely to his advisors, O’Neal would make his decisions without consulting with his advisors (he had none).
· While the Superior CEO encourages the executives to share their views amongst themselves, O’Neal would prohibit any such sharing of personal views. They could only discuss their views directly with him.
· While the Superior CEO looks for harmony, O’Neal would say “Dysfunction is good on Wall Street.” The Superior CEO knows that Dysfunction is not good – erectile or of any other kind.
· While the Superior CEO learns from his experiences and uses them to keep his corporation away from danger, O’Neal would forget what he had learned as Merrill’s CFO during the “Long Term Capital Management” debacle.
· While the Superior CEO believes deeply in auditing, O’Neal would relegate the job of the risk manager to the lowest of places in the managerial structure. People who complained about risk were fired or sidelined.
· While the Superior CEO is aware of what is going on in the corporation, O’Neal did not have a clue about the depth of the danger Merrill was in and would play golf by himself. Apparently he was not alone. Jimmy Cayne of Bear Sterns was also clueless but he preferred smoking pot and playing bridge to playing golf while Bear Sterns’ Hedge Funds were going under,
· While the Superior CEO is aware of what is going on in the industry, O’Neal would continue adding more CDOs to the balance sheet deliberately ignoring the collapse of the two Bear Sterns hedge funds and the fact that Goldman Sachs had practically closed down all operations related to the CDO markets.
· While the Superior CEO consults with his BOD before making transcendental decisions, O’Neal approached first BOA and later Wachovia without consulting the BOD and shamefully offered them the sale of Merrill Lynch as if it was his own personal property.
Contempt for his own brand name
Merrill Lynch was the financial institution that had brought Wall Street to Main Street. It was the financial Wal Mart which for almost 100 years had provided financial services to the less affluent clients. And its CEOs were “Men of the People” (of the employees, customers and shareholders also).
Stan O’Neal was a man who envied the higher classes and despised the lower classes. He was obsessed with Goldman Sachs, the financial Tiffany which serviced the super rich. His ambition was to convert Merrill Lynch into Goldman Sachs. He loved Tiffany, he hated Wal Mart. That, of course, was part of his social and racial resentment – to prove that he could be better without having the skills (risk management and in depth knowledge of the business).
The fact that O’Neal failed to grasp the simple concept of product differentiation by creating separate institutions to service separate types of customers is absolutely amazing. Marriot’s CEO had achieved brand differentiation by having a group of hotels such as Fairfield Inn, Courtyard, Marriot and J.W. Marriot, and had done it without offending its customers, shareholders or employees. The fact that O’Neal did not buy a financial boutique where we could send the more affluent customers and had insisted in turning Merrill Lynch into Goldman Sachs only shows how deep his social and racial resentment really was.
Contempt for his customers
One of the reasons I left Merrill Lynch was because O/Neal ordered the closing of accounts below $1 million. Again his obsession with copying Goldman Sachs which only handles the accounts of the multimillionaires.
His contempt for the “poor” customers became evident when he decided to implement such a policy precisely at the worst possible moment, that is, in the year 2001, when the markets had suffered a severe crash (because of the markets and the towers) and the investors had suffered enormous loses. If you had a $1 million portfolio before the crash and after the crash your portfolio had dropped 50%, how would you feel if now your financial advisor closes your account because you no longer have $1 million? How would you feel especially when your loses were caused by Merrill Lynch’s poor research recommendations?
Why did Merrill Lynch’s research department acted irresponsibly?
I did not know it at the time but Merrill lynch Research used a double standard when it came to sending signals to the readers of its research.
To issue a buy signal, they would classify a corporation as a 1-1. For instance, Microsoft was a A-1-1 which meant it was an A Risk quality with a Buy short term opinion and a Buy long term opinion. When the market collapsed in 2000, Merrill Research changed Microsoft’s rating to C-2-2, meaning:
· For the financial advisor and clients the opinion meant that even though the risk quality had dropped substantially (in one month from A to C?), it was still recommended as a hold short term and hold long term.
· For the financial institutions that followed Merrill Lynch Research, the opinion meant the risk quality had dropped and the stock had to be sold. No holding.
· For the Merrill Lynch trading desk it was a signal to short the same stocks we were asking the customers to hold.
Merrill Research’s gross negligence became even more evident when out of thousands of stocks the research department followed, less than dozen got the sell opinion of 4-4 which meant the Financial Advisors had to advice his clients to sell the stock. With a C-2-2 , the Financial Advisor could not tell the client to sell because that would have been his own personal opinion. He was forced to ask his clients to hold while the other financial institutions sold the stock and Merrill’s trading desk shorted the same stocks we were asking our clients to hold.
Komansky harmed the customers because of his negligence. O’Neal harmed the shareholders and the employees because of his mean arrogance. One could see the satisfaction from the faces of those clients of Merrill Lynch who had lost it all in the crash of 2000 when O’Neal bankrupted Merrill. They considered it poetic as well as Divine justice.
· The I Ching says: The inferior man’s wickedness is visited upon himself. His house is split apart.
That lack of sensibility for Merrill Lynch’s client base which was the result of his obsession with turning Merrill Lynch into a new Goldman Sachs, did heavy damage to the prestige and the good name of Merrill Lynch.
Where were the Merrill Lynch Corporate Principles that appeared so prominently on the wall of every one of our branches?
Contempt for the employees
As CEO, he became famous for rationalizing the cost structure, meaning firing thousands of employees to look good in the eyes of the BOD and the shareholders.
Contempt for Risk
His decision to take risks beyond what any other CEO’s common sense would have allowed is absolutely mind boggling. When recently elected CEO of Merrill Lynch, O’Neal said the first thing he would do was to turn the corporation’s conservative policies into one more aggressive, into one similar to Goldman Sachs and its hedge Fund model.
Merrill Lynch was known as “Mother Merrill” because of its policy of taking care of customers and employees for life. This “Mother Merrill” concept was possible as long as Merrill Lynch would keep both its clients and its shareholders away from high risks.
Under his new mandate and strategy, he took risks that Merrill Lynch would never had taken. He took the corporation to a never seen level of leverage of 30:1. That is like driving down a highway at 300 mph and staying only a couple of feet away from the car in front. With that kind of leverage, there was no room for errors. With an slight drop in the value of the assets, the corporation’s capital is lost and the corporation is technically in bankruptcy.
Contempt for the shareholders
The assets belong to the shareholders. The CEO is responsible for both: A return on the assets as well as The return of the assets.
O’Neal would turn green of envy every time Goldman Sachs would present its quarterly reports. He could not stand to see how Goldman would generate billions in profits and dramatically increase its earnings thanks to the sale of questionable products, products of doubtful quality,
O’Neal decided to turn Merill into a Hedge Fund following Goldman’s example. Again more evidence of his social and racial resentment – I am black, mi grandfather was a slave, but I am going to be better than them. But first, he had to fire those executives who would not take excessive risks and then hire and order executives such as Chris Ricciardi and Osman Semerci to buy CDOs (mortgage products of doubtful quality). His greed and ambition had no limits – he gave instructions not to resell the CDOs to Merrill’s customers (thank GOD) but rather to keep them on Merrill’s own book thus incrementing the corporate risk to $65 billion, That is, O’Neal decided to drink his own “Kool Aid”. In his mind, there was no connect between return and risk. He liked the returns but ignored the risks.
While Goldman Sachs would buy the CDOs to sell them to his clients and later on would even short them as the real traders and experts in risk management that they are (many admire them precisely because they are such ruthless sons of bitches that they would sell their own mothers), O’Neal would continue to buy more and more of these high risk products – even from Goldman Sachs who considered O’Neal a fool.
O’Neal’s synchronicity could not have been worst. He placed Merrill at a $65 million risk precisely when the real estate bubble was about to burst. While Goldman was dumping and shorting these high risk products, smelling the worst ahead, O’Neal’s social and racial resentment kept him blind and continued to push him in the wrong direction, pushing him to buy more and more of these worthless papers.
What was it that Goldman was doing that O’Neal so desperately wanted to do? Goldman generated 80% increments in its earnings year after year while Merrill would generate low earnings and even losses. This envy would make his top executives tremble every time Goldman Sachs would report its quarterly earnings. Instead of blaming himself for so many strategic errors, O’Neal would gather the top executives and would insult and humiliate them by asking the eternal question: why Goldman Sachs doubles its earnings and you cannot do it?. Instead of answering him by saying: because your policies are not worth shit and you have to change them, they would keep quiet. These were the professional brown noses, the ones who had survived his purges of the more talented, experienced and honest executives for speaking their minds, for wanting to save Merrill Lynch from so much madness – O’Neal’s madness.
Contempt for the BOD
· O’Neal arranged a secret meeting with Ken Lewis, the C.E.O. of Bank of America, who had long lusted after Merrill Lynch. Even before the meeting, the two men had talked about a deal, and Lewis had even thrown out a number: $90 a share. At the secret meeting, O’Neal suggested bumping the price to $100. Lewis didn’t object.
· The dinner itself was “frosty,” according to one participant. The directors were angry. “There was no small talk, no humor.” The board members were served their food, and practically before they could take a bite O’Neal said, “I think we should sell to Wachovia.” In an instant, the directors’ anger turned to fury. “Their reaction was vitriolic,” recalls one participant. “I’ve never seen that kind of interplay between a C.E.O. and a board of directors.” The board had zero interest in pursuing a merger with Wachovia.
It is quite an irony that the same corporation O’Neal wanted so much to imitate and failed so miserably at it, was the same corporation that saved Merrill Lynch by arranging the purchase of Merrill Lynch by BOA. Merrill’s shareholders and employees owe a lot to two Goldman Sachs men: Treasury Secretary Hank Paulson, who threatened to fire Ken Lewis, the CEO of BOA. if he didn’t go through with the purchase of Merrill Lynch and John Thain, the CEO who replaced O’Neal and who managed to “persuade” Ken Lewis that Merrill Lynch was a much better option than Lehman.
Merrill Lynch did ultimately wind up in the arms of Bank of America. It happened in mid-September 2008, during “Lehman weekend.” The collapse of subprime securities had led to utter panic on Wall Street. Ken Lewis, like all the other Wall Street C.E.O.’s, had been brought to the New York Federal Reserve that weekend to help figure out how to save Lehman Brothers. Indeed government officials went in half-expecting that Bank of America would buy Lehman. But Merrill’s C.E.O., John Thain, the former top Goldman executive who had, ironically, replaced O’Neal, persuaded Lewis to buy Merrill instead. It wasn’t a hard sell. The price was $29 a share. That triple-A exposure—$42 billion of which was ultimately written down—was precisely the reason Merrill Lynch was so vulnerable.
AFTERTHOUGHTS
Throughout my 44 years of consulting the I Ching, I have almost always asked the oracle business related questions (management and finance). Perhaps because of my business related background and my lack of political expertise, I have kept away from politically related questions. However, I think it is worth it to make one important observation about attitude:
· That attitude so proud, so arrogant and so full of wild ambition that we observe in the political leaders of the world, is not that different from the attitude of some of the more known CEOs in the corporate world.
· That attitude that deliberately and wrongfully interprets the people’s mandate as expressed by their votes, that emboldens some of the political leaders of the world to kidnap the dreams of their own people and replace them with their own twisted desires fueled by social and racial resentment, that makes them go in the wrong direction, and that makes them copy models that do not work such as socialists models, is not that different from the attitude of some of the more known CEOs in the corporate world.
Who told the CEOs of Merrill, Citigroup, AIG and even GE that they could turn their corporations into Hedge Funds without the necessary expertise?
That in the year 2002, a 3000 year old (5000?) Oracle warned the BOD of Merrill Lynch about the need to check O’Neal with a brake of bronze. because If one lets him take his course, Merrill Lynch would experience misfortune, or about something terrible that would happen in the next 7 years if O’Neal was elected CEO, is nothing short of amazing. And is one powerful reason why the BOD of every corporation should make the effort to study and consult the Oracle regularly about the future results of appointments and strategies. That is, to consult the ultimate consultant. Who needs McKinsey, or Duff & Phelps or Arthur D Little when the world has the I Ching? While these consulting firms study the past, the I Ching predicts the future. Would any of these three consulting firms have predicted O’Neal was a poor choice for the CEO position, the same way the I Ching did?
That is the lesson we must learn – that only an innocent Oracle like the I Ching can see through the hearts of evil men and call them out for what they really are. Why a man who was supposed to be such a great manager ended up making so many basic mistakes is something that only an Oracle like the I Ching is capable of knowing.
Let us repeat the mantra for managers and investors:
The I CHING says: “Evil is not destructive to the good alone but inevitably destroys itself as well. For evil, which lives solely by negation, cannot continue to exist on its own strength alone. The inferior man himself fares best when held under control by a superior man.”
The essence of Evil is negation. The essence of Evil is not doing something wrong. We all do something wrong. The essence of Evil lies in denying the fact that we are doing something wrong and in insisting in continuing to do it.
To try to turn Merrill Lynch (a financial Wal Mart) into Goldman Sachs (a financial Tiffany) by allowing the likes of Chris Ricciardi and Osman Semerci to increment the corporate liabilities to $65 billion, by castrating the risk management team, by firing those who pointed to the dangers of such high leverage, and by buying out non-profitable companies such as Scottish & Newcastle’s pub estate ($4.2 billion) and Debenhams ($2.9 billion) – that, is the essence of Evil.
Negation, negation, negation. By failing to recognize that his social and racial resentment was behind his obsession with Goldman Sachs, he destroyed himself as well as Merrill Lynch.
· The I Ching says: The inferior man’s wickedness is visited upon himself. His house is split apart.
Stan O’Neal is the only CEO in Merrill’s 100 years history of service that managed to bankrupt the company. And yet, in spite of such a feat, he managed to blackmail the BOD into paying him the amazing sum of $161 million in severance payments. Again, a case of discrimination in reverse – he got it because he was black, had he been white he would have been thrown in jail.
Those who have tried to apologize for O’Neal saying that Alberto Cribiore, one of the members of the BOD, is to blame because Cribiore bitterly opposed O’Neal’s efforts to sell Merrill Lynch to Bank of America, forget one fact. That O’Neal was responsible for creating the conditions that eventually made him seek the arms of BOA. We all knew in Merrill Lynch that Alberto Cribiore was a pompous idiot who imitated the characters of the Operas he so much loved, but he was not the CEO, O’Neal was the CEO. O’Neal’s job was not to sell Merrill Lynch to BOA, his job was not to fool Ken Lewis by selling him a worthless corporation at $90 a share, his job was not to withhold material information and look for the greater fool in Wachovia. His job as CEO during the Coming to Meet Time-Space was to make sure evil did not re introduced itself in the corporation. Of course, the problem was he was the one who represented evil re introducing itself back into the corporation and bringing more evil with him. With such a CEO, Merrill Lynch was doomed.
NOTE: the I Ching warns us that both Goldman Sachs and Bank of America are going to encounter serious difficulties in the future (see their Hexagrams)
