“With Merrill Lynch & Co. looking bloated in the wake of the long bull market of the 1990s, its board tapped Stan O’Neal to be its next leader and make hard choices about the firm’s direction,” writes Ann Davis in today’s Wall Street Journal.

“He’s doing much more than cutting costs. He is completely re-engineering the famous 88-year-old securities firm.”

“The Merrill of old was a financial supermarket, seeking to compete in all areas of the securities business. The firm muscled its way into most of the biggest stock and bond underwritings, partly because it had a vast force of 20,000 brokers to sell the securities. It had a deep bench of senior people who spent much of their time calling on clients and a growing international empire.”

“Mr. O’Neal has scaled back that ambitious mission. His Merrill doesn’t seek to be all things to all clients. Slashing staff, recently launched ventures and low-margin operations, he is urging managers to move nimbly in and out of whatever areas offer the best returns at a given time.”

“His strategy is a bold gamble. If it works, the franchise could vault to a new level of prosperity. The second quarter was the first piece of evidence, Mr. O’Neal has said. Merrill earned a near-record $1.02 billion, thanks to cost cuts and a good climate for bond trading. Merrill’s own shares are up 70% since March.”

“But the strategy also is fraught with risks. Merrill’s business depends on relationships. Mr. O’Neal has so streamlined the ranks that some clients now don’t have long-running ties with the bankers and brokers trying to get their business. In other cases, Merrill has drastically scaled back services that clients depended on. His is a delicate business challenge: As a CEO out to radically reshape a famous company, Mr. O’Neal must create the new model without losing the culture and esprit de corps that made the company special and its clients loyal.”

“So far, his campaign has been messy. Since he first rose to a position of power two years ago, Merrill’s work force has shrunk by one-third — 23,000 jobs. With no trace of nostalgia, the 51-year-old Mr. O’Neal has rid Merrill of an entire bench of senior leaders. Eighteen of the 23 members of the executive management committee in the previous administration are gone, many forced out as Mr. O’Neal has consolidated his power.”

“A month ago, he even ousted Thomas Patrick, a veteran banker who had helped engineer Mr. O’Neal’s own rise to the top spot. Mr. Patrick incurred the boss’s displeasure by working to install a protege as Merrill president. Soon that protege, global-markets and investment-banking chief Arshad Zakaria, 41, was also asked to resign, say people familiar with the decision. Merrill described both departures as retirements. Mr. Patrick declined to comment. Mr. Zakaria has previously declined to comment through a firm spokesman and didn’t return a call to his home Monday. When Mr. Zakaria leaves at year end, only three of eight high-level executives Mr. O’Neal initially promoted will remain at the firm.”