New No-Name CEOs

The CEOs of two of the largest financial institutions in the country have resigned in recent weeks: Stanley O'Neal of Merrill Lynch, and Charles Prince of Citigroup. These rock-star CEOs, both undone by the festering fallout of the subprime mess, have been replaced by operating executives with far lower profiles. On Monday, when Prince stepped down, he was replaced as chairman by 1990s icon Robert Rubin and as chief executive officer by Win Bischoff, a European banking executive whom resurgent CNBC anchor Maria Bartiromo would probably not recognize. When O'Neal resigned from Merrill last week, the company didn't name a replacement CEO but instead named board member Alberto Cribiore, a private equity executive who could walk anonymously onto the floor of the New York Stock Exchange, to be the interim non-executive chairman.

In time, both firms will likely bring in high-profile CEOs, probably from outside the company, to right the ship. But in the meantime, both banks have swapped household names for no-names. Rubin aside, the new bosses are unknown quantities even to many within the investment banks. It would be like the Yankees firing Joe Torre and declaring that the best person to run the show on an interim basis is the manager of the Class A Staten Island Yankees.

How is it possible that these huge institutions, with their multiple lines of business, layers of management, and vast human resource departments that run nonstop off-site conferences seem to have such thin executive ranks? An article in yesterday's Wall Street Journal article chalked it up to Wall Street's brutal performance-based culture and the fragile egos of O'Neal and Prince, who couldn't tolerate strong personalities or dissenters breathing down their necks as potential successors.

There's something to that. But I think it may have more to do with vast impersonal forces than with brittle individuals. In fact, this sort of executive fallout should be expected in the aftermath of bubbles.

Wall Street (outdated moniker for a financial services hotspot) is as trendy as Seventh Avenue (outdated moniker for a fashion industry hotspot). Even the huge diversified conglomerates like Citigroup and Merrill Lynch, are gigantic trend-seeking missiles. Bankers have finely tuned instincts that sense where the money and momentum are building and try to get there first. If they can't get there first, they come in heavy as second- or third-movers. In the 1990s, it was all about technology and dot-coms. In this decade, it's been all about leveraged lending, subprime mortgages, collateralized debt obligations, structured finance—variations on the sultry theme of easy credit.

Once a trend gets bubbly and starts spinning profits, it builds its own momentum. Over the summer, Citigroup's Chuck Prince famously told the Financial Times: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." Banks can avoid bubble trouble if people in key positions sit out a few tunes when everybody else keeps doing the electric slide. (When the inevitable pop comes, the sticks-in-the-mud inevitably look like geniuses for having less exposure to troubled sectors.) And so the best internal candidate to succeed a CEO who boogied too long might be a wallflower. But given Wall Street's intense focus on short-term profits, such contrarians tend to get tossed out of the dance early in the bubble. Saying no means seeing your rivals take market share and reap huge profits. Analysts who were appropriately skeptical of dot-com stocks in 1997 and '98 were replaced with alacrity by more optimistic analysts. In the last few years, being bearish on subprime mortgages was a form of career suicide.

The corollary, of course, is that the executives who were most aggressive in pursuing new business contributed the most to profits and thus were anointed as stars, future leaders, and potential heirs apparent. But once the bubble pops, such executives go from being heroes to goats almost overnight. The CEO preservation manual dictates that losses should be recognized forthrightly—and instantly blamed on the guys who minted massive profits the year before. In October, as embarrassing write-downs were announced, Citigroup CEO Chuck Prince pushed out Tommy Maheras, co-head of the investment banking unit responsible for capital markets and trading, and Stanley O'Neal ushered the top executives of Merrill's fixed-income unit out the door.

With their pre-emptive write-downs and pre-emptive firings, Prince and O'Neal thought they would put the subprime mess behind them. And they doubtless let out a sigh of relief when the shoe dropped. But popping bubbles unleash an Imelda Marcos-sized collection of stiletto heels onto the heads of executives for a period of several months. When the telecom bubble burst, big suppliers like Cisco, Nortel, and Lucent believed they would bounce back quickly from a bad quarter or two. Instead, their businesses shrank for several years. Notice how the big homebuilders have had to continually reduce earnings and sales projections, only to reduce them again—and again. Having axed the guys responsible for the problem and declaring it quarantined, there was nobody left for Prince and O'Neal to blame when the next round of trouble appeared.

In the wake of bubbles, investors and boards seeking new CEOs naturally look for high-profile internal candidates who weren't complicit in the damaging bubble-era decisions. But outside the building staff, and the first-year analysts fresh out of Wharton, it's hard to find people who meet those criteria. Which is why the boards of both Citigroup and Merrill Lynch are likely reaching out to blue-chip executive-search firms for leads on a new boss.

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