Merrill Hires Kronthal as Consultant on Mortgages (Update3)

By Bradley Keoun


Dec. 17 (Bloomberg) -- Merrill Lynch & Co. enlisted Jeff Kronthal, a onetime bond-trading executive fired last year by former CEO Stan O'Neal, to advise on stanching the firm's mortgage-related losses.

Kronthal, 53, will become a consultant to New York-based Merrill, Co-President Greg Fleming said today in an internal memo that was confirmed by spokeswoman Jessica Oppenheim. He'll counsel fixed-income chief David Sobotka, Fleming wrote.

Chief Executive Officer John Thain is bringing back one of six top bond-trading executives who O'Neal ousted in a shakeup designed to spur risk-taking at the firm. The push to underwrite mortgage-backed securities backfired, leaving Merrill with a record $2.2 billion third-quarter loss and O'Neal out of a job.

Merrill, the third-biggest U.S. securities firm, will seek Kronthal's advice on its $21 billion inventory of subprime mortgages and related collateralized debt obligations, or CDOs, according to Fleming's memo. Kronthal worked at Merrill for 17 years before O'Neal pushed him out.

Kronthal's assignment is temporary and won't lead to a full- time job, said two people with knowledge of the matter.

He started a hedge fund, KLS Diversified Asset Management LP, in September with Harry Lengsfield, one of the Merrill executives O'Neal replaced in 2006, and John Steinhardt, a former JPMorgan Chase & Co. debt-trading executive, said one of the people, who declined to be identified because the fund's status isn't public.

Bonus Cuts

The partners have raised $200 million and plan to start operations by mid-2008, the person said. Kronthal probably will return from Merrill before then, the person said.

Kronthal didn't reply to a phone call and e-mail seeking comment.

Merrill had $7.9 billion of third-quarter writedowns related to its mortgage holdings and may have to cut their value by another $10 billion this quarter, Deutsche Bank AG analyst Mike Mayo estimated in a Nov. 2 report.

Year-end pay awards for the group that caused the losses may be cut. Merrill told fixed-income managers to reduce 2007 bonuses by an average of 40 percent, according to two people briefed on the matter.

Payments may fall by as much as 80 percent for traders who specialize in the mortgage bonds and CDOs with the steepest losses, said the people, who declined to be named because the decisions aren't public. Bonuses may drop 20 percent for interest-rate traders and 60 percent in the firm's corporate bond unit, the people said.

Merrill fell 57 cents, or 1 percent, to $56.27 at 4:01 p.m. in New York Stock Exchange composite trading. The shares have declined about 40 percent this year.

Thain, the former CEO of NYSE Euronext, succeeded O'Neal on Dec. 1. One of Thain's first steps was recruiting NYSE finance chief Nelson Chai to replace Merrill Chief Financial Officer Jeff Edwards.