O'Neal out at Merrill

NEW YORK (CNNMoney.com) -- After a notable 21-year career at Merrill Lynch & Co., Stanley O'Neal stepped down Tuesday as chairman and CEO, less than one week after the firm stunned Wall Street by revealing an $8 billion loss on risky investments in subprime mortgages.

Merrill (Charts, Fortune 500) shares finished 2.7 percent lower in Tuesday afternoon trade on the New York Stock Exchange.

Merrill Lynch boardmember Alberto Cribiore will serve as interim non-executive chairman until a successor for O'Neal is determined, the company said.

The nation's largest brokerage said O'Neal, 56, would retire immediately and that board member Alberto Cribiore would take over for him as interim non-executive chairman.

Merrill said both O'Neal and the board agreed that a change in leadership would help the company move forward as it attempts to overcome the $8 billion in losses it suffered last week.

Cribiore, who has served on the board since 2003 and is a managing partner of the private equity firm Brera Capital, thanked O'Neal for his contributions to the firm.

"His commitment to the company, its clients, shareholders and employees has never wavered and the company will reap tremendous benefits in the future from his work," said Cribiore, who previously served as a president of private equity firm Clayton Dubilier & Rice.

Merrill also said that Cribiore, 59, would lead a search committee to identify and evaluate chief executive candidates from inside and outside the company.

A Merrill Lynch spokesman gave no indication how long the candidate search process would take.

With no replacement in place, Merrill's board finds itself in a tricky position, said Eileen Fahey, a managing director at Fitch Ratings. "You never want to be a ship without a captain - that's essentially what they have at the moment," she said.

At the same time, it would make sense for the board to proceed with caution. "It's better for the board to find the correct person and I believe they are looking for someone to change how Merrill operates."

Among those mentioned as potential candidates are Laurence Fink, chairman and CEO of investment firm BlackRock (Charts), in which Merrill owns a 45 percent stake; John Thain, CEO of NYSE Euronext (Charts); Bob McCann, the head of Merrill's brokerage division; and Gregory Fleming, Merrill's co-president and co-chief operating officer.

Some analysts have argued, however, that whoever takes the reins at Merrill faces a difficult challenge ahead. Besides facing eroding morale among workers, the company also has about $15 billion worth of troubled collateralized debt obligations, which prompted last quarter's loss, sitting on its books.

"Just because there's a change in the CEO doesn't change the challenges Merrill faces," said Lehman Brothers analyst Roger Freeman. "This could be a slow death spiral for these securities."

The company also deflected reports that other top execs may follow O'Neal out the door. Merrill said that Fleming and Ahmass Fakahany will remain as co-presidents and chief operating officers, but it said that Fakahany, who reportedly helped oversee the company's bad bets on mortgage-backed securities, would no longer oversee Merrill's risk management business.

O'Neal recent troubles compounded last week, following an announcement that the company would take an $8 billion hit in the third quarter from bets on subprime mortgages.

O'Neal had been in the spotlight three weeks earlier after the company had estimated that the hit would be about $4.5 billion. The larger-than-expected writedown prompted a $2.3 billion loss in the quarter and a downgrade of the firm's credit rating.

O'Neal reportedly had also been in trouble with his board for approaching the CEO of Wachovia (Charts, Fortune 500), the nation's No. 4 bank, about a possible merger of the two financial services giants without getting the approval of Merrill's board, according to a report last week in the New York Times.

Those talks raised questions on Wall Street about whether Merrill will be able to remain independent.

O'Neal was widely expected to announce his resignation as early as Monday, although Merrill remained silent about his status within the firm. Some experts believed that Merrill's attempt to locate a successor for O'Neal or work out his severance package delayed the announcement of his resignation.

The Merrill spokesman said O'Neal would not receive a severance package, but that he would have access to all the stock he received during his tenure at the company. Merrill declined to disclose how many shares O'Neal accrued.

Published reports about what O'Neal may walk away with have ranged from $129 million to $160 million.

Last year, O'Neal took home $46 million in compensation in 2006, including salary and annual bonuses.

According to a profile from Harvard Business School, where he got his MBA in 1978, O'Neal was born into poverty in Wedowee, Ala. He worked as a young boy picking cotton on a family farm, while his mother worked as a cleaning lady.

When O'Neal was 12, his family moved to Atlanta and his father went to work at a General Motors (Charts, Fortune 500) plant. O'Neal also worked at the plant as a teenager, and GM tapped him to attend General Motors Institute and paid for him to get his MBA. He worked for eight years in the automaker's New York finance office and in Madrid before moving to Merrill in 1986.

He rose through the ranks at Merrill, becoming president and chief operating officer in July 2001; he was tapped as CEO in December 2002 and added the title of chairman in April 2003. The posts made him one of the most powerful African-American executives on Wall Street, along with Kenneth Chenault, who holds those two titles at American Express (Charts, Fortune 500).

After taking over as chief executive, O'Neal quickly earned a reputation as an aggressive cost cutter. By slashing jobs and shutting down operations around the globe, he helped revive Merrill's stock, which reached an all-time high in January. Merrill shares have lost 33 percent of their value since this summer's market meltdown.

In the firm's announcement Tuesday, O'Neal thanked his colleagues for their efforts to build the firm and said he relished his years working for the Merrill Lynch franchise.

"The company has provided me with opportunities that I never could have imagined growing up, culminating with my leadership of the company over the past five years," he said.