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Why CEOs Are On the Hot Seat

It's open season on CEOs again.

Merrill Lynch's Stanley O'Neal took his turn as the new trophy target earlier this week, and before you could yell "Off with his head!" two more candidates already were lining up: Bear Stearns chief executive James Cayne, and that perennial presence on the who's-next hit list, Citigroup Chairman Charles Prince.

Now in some cases maybe a rude ouster is more than overdue, with its commensurate multi-million dollar parachute package and the ensuing outcry from outraged investors.

But the real worry is the subtext that drives these kerfuffles: The SarbOx Syndrome — a passion play of second-guessing, recrimination and punishment that turns out to be far worse for investors than the misdeeds that got their CEOs fired in the first place.

Wall Street has been awash in this negative froth for several years now, still stung by the burst of the stock-market bubble and the startling scandals that followed (Enron, WorldCom, Tyco, Adelphia and more). It is why Congress ended up passing the Sarbanes-Oxley Act, an anti-fraud, headline-stealing sop to corporate chicanery that wrapped in ill-conceived fixes that had been lying around, dormant, for years.

The essence of SarbOx is that, because of the sleazy doings of a relative few, no one in the executive suites at some 5,000 pubilcly held companies is to be trusted, ever. So let's force chief executives to personally sign off on the legitimacy of their financial reporting (never mind that a criminal will happily put pen to paper, how better to fool his victims?); and let's force companies to find a new audit firm after five years on the job (the perfect move for a lying CEO who wants to rid himself of a firm that knows his company finances all too well).

What counts here is appearances. And what resulted is a billion-dollar business of SarbOx compliance — software that has an automated tattletale to go over your head when you fail to file paperwork on time; fingerwagging consultants with furrowed brows who warn you when you come close to the line; and independent directors with little experience in business who now are vested with the authority to second-guess the seasoned leaders who actually know what they are doing.

In this atmosphere, short-term gaffes are all-encompassing and big mistakes are punished severely — despite the fact that high-risk, high-reward capitalism requires a willingness to endure errors, to miscalculate now and then on the path to creating new wealth.

Thus Stan O'Neal is out of Merrill, and Wall Street swells decry the $160 million package he takes with him as "raping shareholders," even though he earned it over more than 20 years at the firm; and even though he had performed incredibly well for five years in which the market endured tons of turmoil.

Look at the numbers: In 2006 O'Neal earned $48 million, what some would view as an outrage. Yet that amounted to less than a tenth of 1 percent of the huge revenue Merrill Lynch took in that year; and the firm added $18 billion to its total market value in 2006; the stock was up 40 percent. Over five years Merrill shares rose a lofty 66 percent even after the tumble they took in the past few months.

One thing that drove the rise was O'Neal's move away from the staid old brokerage business and into private equity and high-risk trading in the CDO's (certified debt obligations) that, just last week, resulted in a $7.9 billion charge. Whoops. No one complained when they were benefiting from this bold bet; but when it goes bad, only one person — Stan O'Neal — is to pay the price, with his career. So he's the only guy inside Mother Merrill who screwed up? What about the board, or the audit committee, or the chief financial officer and a passel of other players?

Maybe a hidden agenda drove Stan O'Neal's exit.

Merrill Lynch's board fired him, in my view, mainly because he had the temerity to approach Wachovia as a possible merger partner without consulting the board. How dare he!

Yet why can't a chief executive put out a feeler these days, without having to formally notify every director and then inevitably have to deal with the fallout when some of those board members leak the news to pals?

And O'Neal is out because the old-guard brokers at Merrill resented his emphasis on the newer businesses; when they got their chance, they turned on him.

And so it is, maybe, for Jimmy Cayne at Bear Stearns.

A Page One story in the usually cautious Wall Street Journal today argues that Cayne was off playing bridge while his firm writhed in submortgage fallout. You have to get to the "jump" on page A16, at the top of the second column, to get to the real scandal: He smoked pot! In 2004! At the end of bridge tournaments!

Implication: Bear Stearns fell out of bed, its stock has skidded almost 30% since January, because Jimmy Cayne was toking on a doobie.

Please. No proof is offered, at all, of how any bridge-playing and pot-inhaling had any real effect on the firm, but now the implication is out there. And no doubt Cayne's enemies helped put it there; his own employees own a large chunk of the firm.

As for Citigroup's Chuck Prince, enemies may play a role in his possible ouster, too, albeit he has done plenty to get himself into trouble.

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In the past few years he presided over myriad Friday night massacres, taking out some players who might have been able to rival him for control of the firm.

Citi has something like 900 consumer branches to Bank of America's 6,000; and now its CDO business on the fancy side of the house is reeling.

But he has one thing at his flank that Stan O'Neal and Jimmy Cayne lack: a big holder who, so far, has stood by him, the Saudi Prince Alwaleed. If that prince turns on him, the other Prince will be out of a job by year-end.