In his 2006 letter to Berkshire Hathaway (NYSE: BRK-B ) shareholders, Warren Buffett listed four criteria by which to select a company director: They should be "owner-oriented, business savvy, interested and truly independent." Alberto Cribiore, who served on the board of Merrill Lynch between 2003 and 2008, failed on at least two of those criteria. It's a shame that former Merrill CEO Stan O'Neal didn't spot this when he asked him to join the board in 2003: According to a recent account by William Cohan in Fortune, Cribiore may have ultimately cost Merrill shareholders $50 billion.
Act 1: Concern
By the late summer of 2007 -- the very start of the credit crisis -- O'Neal had become gravely concerned about the multibillion dollar exposure to CDOs (collateralized debt obligations) on Merrill's balance sheet. Unable to gauge the size of potential losses, he reasoned that taking writedowns and raising capital wouldn't solve the problem, particularly in a rapidly deteriorating market. Convinced his options were narrowing quickly, O'Neal decided the only practicable solution was to sell the company.
Act 2: Action and reaction
Bank of America (NYSE: BAC ) was an ideal suitor; O'Neal met with CEO Ken Lewis on Sept. 30, 2007, to discuss a deal. O'Neal says the two executives discussed a price of $90 or $100 a share, which would have valued Merrill at around $100 billion. The next day, O'Neal met with Cribiore, who voiced his opposition to the deal. O'Neal didn't even take the idea to the full board, judging that he wouldn't be able to sell the deal in the face of Cribiore's opposition. Cribiore, a former partner at a top-tier private equity firm, was the most sophisticated board member in terms of investment banking experience.
At the beginning of October, O'Neal made an overture to Wachovia. Once again, Cribiore shot the plan down, responding: "Why should we want to move to Charlotte and become Wachovia?" Cribiore rallied the support of another board member to his position, who spoke against a merger at Merrill's October board meeting. Events in the mortgage market then overtook O'Neal: At the end of that month, he was forced to resign after Merrill announced subprime-related losses well in excess of earlier estimates.
Act 3: Bank of America ex machina
Less than a year later, during the same weekend that Lehman went bankrupt, Merrill threw itself into the arms of Bank of America in a $50 billion transaction. There was no protest from Cribiore then -- he'd already left the building, having resigned his board seat less than two weeks earlier to take a senior-level position in investment banking at Citigroup (NYSE: C ) .
His transition to an executive role at another firm was hardly surprising. From the outset of his tenure on Merrill's board, Cribiore had hoped O'Neal would help him find a job within the bank to revive a stalled career. Although O'Neal didn't "push" Cribiore, he did allow him to have conversations with Merrill executives. Was Cribiore "interested" in being a board member? Certainly -- wholly self-interested! The conflict with his duty to shareholders is absolutely staggering.
From the annals of costly misses
The only other missed opportunity that I can think of that cost the target company's shareholders anywhere near the same amount is Microsoft's (Nasdaq: MSFT ) bid for Yahoo! (Nasdaq: YHOO ) . In fact, Yahoo! rebuffed two bids from the software giant, the second of which valued the Internet portal at $43 billion. More than two years on, Yahoo!'s market value is less than 60% of that amount -- a $17.5 billion haircut.
O'Neal's stock goes up -- a bit
That Stan O'Neal wanted to sell Merrill a year before the banking crisis reached its apex in September 2008 burnishes his reputation somewhat. It now appears he had a clear grasp on reality -- something that can't be said for his counterparts James Cayne at Bear Stearns (sold to JPMorgan Chase (NYSE: JPM ) at a firesale price) and Dick Fuld at Lehman Brothers (bankrupt). Nevertheless, given the stakes involved, it is confounding that O'Neal wasn't more aggressive in pushing for a sale at the board level.
Who will watch the bankers?
This episode is spectacular illustration of the enormous harm that a single board member can do if the other directors, due to lack of industry expertise, can't offer a proper counterweight. There may yet be hope for banks, though: According to a Moody's report published last month, "Bank Boards in the Financial Crisis," the proportion of outside directors with financial industry experience has risen to nearly half (46%) from its pre-crisis level of one-third (32%). Still, Moody's concludes that, "financial industry expertise among outside directors remains weak or is just absent at some banks" (italics mine), and it singled out two of America's best-run banks in that regard: JPMorgan Chase and Wells Fargo (NYSE: WFC ) . Indeed, JPMorgan doesn't have a single outside director with a banking industry background!
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