Merrill's Former Chief Tully Calls Losses `Sickening' (Update1)

By Bradley Keoun

Oct. 28 (Bloomberg) -- 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 yesterday 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. The New York Times, citing people briefed on the discussions, said on its Web site today Merrill's board has reached a ``broad consensus'' that O'Neal will not remain in his position.

``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 $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 Oct. 26 to discuss his potential departure, the Wall Street Journal reported.

`It's Awful'

The third-quarter net loss of $2.24 billion, or $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 U.S. 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. It's sickening.''

Merrill Lynch spokesman Michael O'Looney declined to comment.

The New York Times reported that brewing unhappiness within the firm, and expressions of discontent from employees, suggest how quickly the board may feel the need to move. It said details remain to be worked out, including who will take over and what the timing of O'Neal's departure will be.

The newspaper said Laurence Fink, CEO of money manager BlackRock Inc., is a leading candidate to replace O'Neal.

`Pales by Comparison'

Tully, who started out as a stockbroker and spent four decades helping build Merrill into what is now the third-biggest U.S. 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 $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.

Asset Sales

O'Neal said in an Oct. 24 conference call that he would consider divesting ``non-core assets,'' without being specific. Merrill's holdings include a 49.8 percent stake in BlackRock, and a passive, 20 percent stake in Bloomberg LP, the parent of Bloomberg News.

The New York Times reported Oct. 26 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.