In what were already testing times for bosses of some of the world's biggest banks, the expected departure of Stan O'Neal from Merrill Lynch will have set nerves jangling.
Mr O'Neal is the biggest casualty yet of the credit crunch that has wiped billions of dollars from the income statements of investment banks on Wall Street and in Europe. His crime was not only to record the worst result from the market turmoil – a $2.3bn (£1.11bn) third-quarter loss – but to get his numbers wrong in a big way.
On 5 October, Mr O'Neal said third-quarter write-downs would be $4.5bn, only to add another $3.4bn less than three weeks later. And just when he needed the support of his board, he lost its trust by going behind their backs to try to do a merger with US rival Wachovia.
The downfall of Mr O'Neal eclipses the departure of Peter Wuffli, the former chief executive of Swiss giant UBS, who was previously the biggest figure to stand down, in July, after one of the bank's hedge funds blew up because of sub-prime losses.
Mr O'Neal's was an extreme case. Having said that Merrill should take on more risk, he was personally identified with the company's move beyond its traditional brokerage business in search of higher returns. Under his leadership, Merrill rose to be the biggest underwriter of collateralised debt obligations, the opaque repackaged debt products that have been at the heart of the market meltdown.
But both Merrill Lynch and UBS, whose core strengths lie in managing clients' wealth, came a cropper after trying to play catch-up with rival investment banks in fixed-income business. UBS wrote down SFr4bn (£1.66bn) for the third quarter at its fixed-income business, ousted the head of investment banking and announced 1,500 job cuts.
The last two months have seen chief executives trying to draw lines under the crisis by giving figures on write-downs from the credit crunch. The announcements brought a sigh of relief from investors, who bought banks' shares even as they announced massive potential losses. All bank chiefs will know that if they have got it badly wrong, as Mr O'Neal did, they could face a similar fate.
Peter Hahn, a fellow at Cass Business School and a former managing director at Citigroup, said: "We are far from seeing an end to this. People are saying banks have got everything out there but that is foolish."
Yesterday, UBS said it could face further write-downs from the US sub-prime crisis but reiterated its guidance for third-quarter results, which it announces today.
Mr Wuffli and Mr O'Neal are the only men at the top of their firms to have fallen on their swords so far. Other bank bosses have tried to deflect the blame by sacrificing the people who ran the businesses where the disasters occurred.
At Bear Stearns, James Cayne, the chairman, ousted his friend and colleague of 20 years, Warren Spector, whose business ran two hedge funds that imploded because of sub-prime losses. At Citigroup, Thomas Maheras, the head of investment banking, fell on his sword as Chuck Prince, the chairman, remained in place.
Mr O'Neal had already sacrificed the bank's head of fixed income, Osman Semerci, before the spotlight swung decisively on to the Merrill chairman himself. And in the long fallout from the credit crunch, others may yet find that the buck stops at the top of their firms as boards seek to show investors things really will be different in future.
Guy de Blonay, who manages New Star's Global Financials Fund, said: "After the scale of the debacle and the complacent behaviour with regard to risk, sadly heads would have to roll as a result for the ones that have clearly had excessive exposure to the debacle. It will probably continue to bring more casualties as more and more managements become aware of their true exposure to these businesses."
Ken Lewis, chairman of Bank of America, has also swung the axe – he is cutting 3,000 investment banking jobs. Mr Lewis may have been in charge as Bank of America built up its investment banking business, but he has few other marks against him after building his lender, based in Charlotte, North Carolina, into a US national banking giant.
Others, like Mr O'Neal, could find that sub-prime losses come on top of other misdemeanours that make investors grow weary of them. The main boss in this category is Chuck Prince of Citi-group. His boast that Citi was "still dancing" to the leveraged buyout tune just before the markets froze came on top of a series of embarrassments and investor disquiet about his inability to get to grips with costs after four years in the hot seat.
The two main concerns for UK investors are Barclays and Royal Bank of Scotland. Both have tapped the rapidly expanding debt markets for growth in recent years. Barclays became a leading player in the structured credit world by pioneering products such as the now infamous SIV-lite, while RBS has been one of the biggest lenders for leveraged loans in Europe.
The banks fought a bitter battle for ABN Amro, with RBS and its consortium partners emerging the victor. Worse-than-expected investment banking losses could weaken the positions of the Barclays chief executive John Varley or RBS boss Sir Fred Goodwin. In Barclays' case, they would add to questions about strategy. For RBS, errors exposed by the crunch could compound fears that RBS overpaid for an acquisition during a banking crisis.
The fallout from the credit crunch will be long and painful. With the world economy slowing, bank business models that did well as all markets were rising could have their weaknesses exposed. The third-quarter results helped to show which banks knew what they were doing. As Merrill was reporting the worst result in its 93-year history, Goldman Sachs continued to power along, posting a 79 per cent surge in profit on gains from betting against mortgage-backed securities.
Mr Hahn said: "The party is over and we are starting to sort the amateurs from the professionals and that is a very important thing to happen. Boards of directors at all financial institutions should be saying, 'What do we do well and what are we really not one of the leading players in?'"
At the banks exposed as amateurs, the men at the top will be desperately manoeuvring to make sure they are not the ones who take the blame.
Chairman and chief executive, Citigroup
Damage: $6bn write-down
How Mr Prince must regret his comment in July that while the music played the biggest US bank was "still dancing".
Chairman and chief executive, Deutsche Bank
Damage: ¿€2.2bn write-down
Germany's biggest bank said this month it expected write-downs from the market meltdown to cause a loss of up to ¿€350m at its investment banking business. But Mr Ackermann said Deutsche would still achieve a ¿€1.2bn pre-tax profit.
Chairman and chief executive, Merrill Lynch
Damage: $7.9bn write-down
Mr O'Neal's time in charge of the broker was all but over last night after Merrill was forced to increase its credit-crunch write-downs massively less than three weeks after issuing a far lower estimate.
Chief executive, Barclays
Damage: not known
Barclays is the British bank that has caused the most concern during the credit crunch. Mr Varley and BarCap's boss, Bob Diamond, have said that it has weathered the credit crunch, but with a trading statement not due until late next month investors remain wary.
Chairman and chief executive, Bank of America
Damage: $4bn of write-downs and losses
The combative boss of Bank of America's verdict on the credit crunch was that he had enjoyed "all of the fun I can stand in investment banking" after a 10-year expansion of that business came crashing in on him.
Chairman and chief executive, Bear Stearns
Damage: $700m write-down
The 73-year-old Wall Street veteran has faced a storm of criticism for failing to understand the credit crisis, despite running a bank among the most exposed to the mortgage-back-ed bond market.Reuse content