For the first 54 years of his life, Stan O’Neal, the ousted chief executive of Merrill Lynch, the first African-American to run a major Wall Street firm and the grandson of a freed slave, hit one home run after another. Then America’s sub-prime mortgage crisis came along.

A single-minded determination, which prompted elocution lessons to modify his Southern drawl and would later alienate him from colleagues, helped Mr O’Neal to climb from a poor background in the cottonfields of Wedowee, Alabama, to General Motors’ shopfloor, where he won a scholarship to study at Harvard.

He continued his dizzying ascent, joining Merrill Lynch’s bond department in 1986 and taking its top job in 2002. There he quickly set about dismantling the deeply ingrained “Mother Merrill” culture, which accepted lower profits in place of risk. By simultaneously cutting costs through mass redundancies and stepping up exposure to higher-margin areas such as loans and equity for leveraged buyouts, commodities and risky sub-prime mortgages, Mr O’Neal was able to double profits to average more than $5 billion (£2.4 billion) annually between 2003 and 2006.

Most of the additional profits from Mr O’Neal’s move away from Merrill’s core stock underwriting and money-management business came from investing the group’s own cash in these higher-risk areas.

In 2006, Merrill made a $7 billion profit investing from its own balance sheet, compared with $2.2 billion in 2002. But with one eye on the ever-increasing profits that Goldman Sachs was making, Mr O’Neal got carried away, paying less and less attention to risk in the pursuit of bigger profits. In effect, he took a culture that was inherently against risk, changed it and it blew up in his face.

In the move that is principally responsible for his downfall, he increased investment in so-called collateralised debt obligations (CDOs), or pools of bonds largely backed by sub-prime mortgages, from about $1 billion 18 months ago to more than $40 billion. This year, defaults on these mortgages surged and the market for the securities collapsed. In the end, the CDO losses were responsible for $7.9 billion of the $8.4 billion writedown, announced last week, which gave Merrill its largest quarterly loss, of $2.24 billion, in its 93-year history.

Nor do Merrill’s sub-prime travails appear to be over. Some analysts are predicting that the group will take a further $4 billion writedown this quarter as the fallout from America’s housing crisis continues to force down the value of CDOs.

But the sub-prime crisis was not the only reason for the downfall of Mr O’Neal, whose management style did not frequently translate into consensus-building. He often drove through his own agenda, with minimal discussion, in a pattern that culminated in his unilateral approach to Wachovia this month.

That approach, which came to nothing, will no doubt have infuriated board members because they were not consulted. Further, it does not look good for Mr O’Neal that he stood to make millions in the event of a takeover.

Mr O’Neal’s habit of sacking long-term staff that were loyal to the group and had a wealth of experience also rebounded on him. In one such move, he ousted three bond executives – Jeffrey Kronthal, Harry Lengsfield and Doug DeMartin, in July 2006 – three people who might have helped to steer Merrill Lynch through its sub-prime woes.

As he contemplates his time at Merrill Lynch, Mr O’Neal might question the wisdom of the strategy he voiced in 2002: “The Mother Merrill, cradle-to-grave thing isn’t possible to do. It’s not even smart.”

Although the board should give Mr O’Neal’s successor due deliberation, a replacement needs to be appointed fairly swiftly – within a month, say – to eliminate the kind of uncertainty that may lead to mass resignations.

The replacement will need to rebuild credibility with investors and staff by reassuring them that Merrill’s existing CDO portfolio will be handled as well as possible and that these kinds of high-risk investments are in the past. Most importantly, the new chief executive must implement the changes without hurting the brokerage business, which is performing extremely well.

Big names under starter’s orders

Gregory Fleming

The co-president of Merrill Lynch is well liked in the group and was a key architect of its takeover of BlackRock. He made his name at Merrill doing financial deals, such as the $14.5 billion merger between Wachovia and First Union. However, he does not have the operational experience of running a large investment bank

Laurence Fink

The king of Wall Street’s chief executive shortlist, Mr Fink has previously been viewed as a key contender for the top jobs at Morgan Stanley and Citigroup. Mr Fink runs the BlackRock investment firm, which is 49 per cent-owned by Merrill Lynch. It has extensive interests in mortgage-backed bonds, the main source of the group’s woes and in which it has lost a number of senior executives

John Thain

The chief executive of Euronext NYSE would appear to be the top external candidate for the job. He is a well-regarded chief executive with experience running a big company on Wall Street. He is also a former president of Goldman Sachs, one of the most formidable operations in the financial world

Bob McCann

As head of Merrill’s brokerage unit, Mr McCann has not been tainted by the bond fiasco and retains his credibility. He is well liked within the firm, although he does not have Mr Fink’s deep knowledge of the bond market

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