The risky business of leadership

NEW YORK (Fortune) -- The precipitous, crisis-ridden exit of Stan O'Neal from the pinnacle of trouble at Merrill Lynch and the near-certain departure today of Citigroup CEO Chuck Prince hammer one point home: In today's financial institutions, which are invincibly complex, it is the responsibility of the CEO to be the chief risk manager and to do the work well. This is a job that cannot be delegated.

Ironically, O'Neal may have overzealously grasped that point; it was he personally who drove Merrill Lynch (Charts, Fortune 500) to assume ever-greater risks. But as a risk manager he proved to have no talent - no concept of when to apply the brakes.

So Merrill Lynch ended its third quarter with a $7.9 billion writedown on subprime mortgages and complex debt securities called collateralized debt obligations, and another $500 million writedown of leveraged loans.

And in the early days of the post-O'Neal period, Merrill is besieged with charges - which it says it believes to be untrue - that it illegally "parked" securities with hedge funds, so as to spare itself still more losses.

At Citi (Charts, Fortune 500), Chuck Prince grew up in the ambit of Sandy Weill, who detested risk. That tutoring aside, Prince's ability to be a maestro of securities risk has never been highly visible. In the words of one banker who likes Prince but has always doubted his suitability for the top job at Citi: "My God, he's a lawyer."

So it is that Citi reported third-quarter losses of $1.56 billion on CDOs, subprime mortgages, and leveraged loans and another hit of $1.5 billion on credit trading and leveraged lending commitments. Moreover, there are great suspicions around that Citi will be required to own up to additional losses.

Note to the boards of Merrill and Citi: When you're looking for CEO replacements, keep in mind that proven skills in risk management need to go at the top of your list. Nothing about the financial world today, with all of its arcane securities, suggests that the challenges of handling risk are due to get easier.