Merrill Lynch

For securities industry professionals, Merrill Lynch is historically significant as the firm that democratised access to the stock market for ordinary Americans — transforming what had been an exclusive preserve of the wealthy into an accessible investment opportunity for the middle class — and as the firm whose early Bloomberg Terminal subscription gave Bloomberg LP its first institutional foothold and helped launch the financial data revolution that transformed professional securities practice.

Historical Origins — Bringing Wall Street to Main Street

Charles Edward Merrill was born in Green Cove Springs, Florida in 1885 and came to Wall Street in the early 1900s after briefly attending college and working in several other industries. He founded Charles E. Merrill and Co. on January 6, 1914 — initially focusing on underwriting securities for chain store retailers including Safeway Stores and S.S. Kresge, identifying the retail sector as an underserved opportunity for capital markets financing.

Edmund Calder Lynch — whom Merrill had met at the YMCA in New York — joined the firm in 1915 and became co-founder, with the firm renamed Merrill Lynch and Co. The two built the firm through the following decade as a bond house — underwriting corporate and government securities and distributing them to investors through a growing network of relationships.

In 1926 Merrill helped organise Safeway Stores as a major chain store consolidation — a transaction that demonstrated his vision for the role investment banking could play in the consolidation of American retail industry. In 1930, as the Depression began, Merrill sold the firm's retail brokerage operations to E.A. Pierce and Co. and focused on investment banking until 1940 when he merged the two firms back together — creating the foundation of the modern Merrill Lynch brokerage organisation.

The 1941 merger with the New Orleans-based brokerage Fenner and Beane created the full name Merrill Lynch, Pierce, Fenner and Beane — which became Merrill Lynch, Pierce, Fenner and Smith in 1958 when Smith's name replaced Beane's in the firm's title.

The Thundering Herd — Democratising Investment

Charles Merrill's most consequential contribution to American finance was his conviction — radical for the 1940s and 1950s — that ordinary middle-class Americans should own stocks and that the brokerage industry's job was to serve them honestly and transparently rather than exploiting their inexperience.

Merrill rebuilt the firm's retail brokerage operations after the 1940 merger on a foundation of customer education, transparent pricing, and ethical practice that stood in deliberate contrast to the commission-hungry sales culture that had characterised much of the pre-Depression brokerage industry.

The firm published free research reports for retail clients, eliminated certain hidden fees, trained its brokers to understand client needs rather than simply push products, and advertised broadly to reach investors outside the traditional Wall Street clientele.

The advertising campaign that would define the firm's identity — featuring a thundering herd of bulls under the tagline Merrill Lynch is bullish on America — captured the firm's optimistic populist investment philosophy and created one of the most recognisable brand identities in American financial services history. The thundering herd nickname for the firm's army of financial advisers became the defining cultural metaphor of the retail brokerage industry.

By the 1970s and 1980s Merrill Lynch had grown into the largest retail brokerage firm in the United States — with a nationwide network of branch offices, thousands of registered representatives operating as FINRA-regulated broker-dealer agents, and a client base that encompassed millions of individual investors who had never previously owned securities.

The Public Company Era — Growth and Innovation

Merrill Lynch completed its initial public offering in June 1971 — one of the first major Wall Street firms to go public and access the capital markets to fund its own expansion. Trading on the New York Stock Exchange under the ticker MER, the firm used its public currency to fund geographic expansion, technology investment, and a series of acquisitions that broadened its product capabilities.

Merrill Lynch was among the first major brokerage firms to invest heavily in financial technology infrastructure — developing proprietary systems for account management, portfolio tracking, and trade execution that gave its financial advisers tools to serve their growing client bases more effectively.

The firm's original investment in Bloomberg LP — purchasing a thirty million dollar equity stake and subscribing to the first Bloomberg Terminals in 1982 — reflects Merrill's historical role as an early adopter of financial technology and its significance as an institutional launch partner for what would become the foundational data infrastructure of the global securities industry.

The 2008 Financial Crisis — Rescue and Acquisition

Merrill Lynch's near-collapse in September 2008 was one of the defining events of the financial crisis — and its emergency acquisition by Bank of America over the same weekend that Lehman Brothers filed for bankruptcy ranks as one of the most consequential transactions in the history of American finance.

Merrill Lynch had expanded aggressively into the market for mortgage-backed collateralised debt obligations from 2003 onwards and in 2006 acquired First Franklin Financial — a major subprime mortgage originator. As housing prices collapsed in 2007 and 2008, Merrill's massive CDO portfolio generated catastrophic losses — in the twelve months from July 2007 to July 2008 the firm lost approximately 19.2 billion dollars, or fifty-two million dollars per day on average.

By September 2008 Merrill Lynch's liquidity was evaporating and the firm faced the prospect of following Lehman Brothers into bankruptcy.

Over the weekend of September 13 and 14, 2008 — as Lehman Brothers was preparing its bankruptcy filing — Bank of America and Merrill Lynch negotiated an emergency acquisition in less than 36 hours, with federal regulators actively encouraging the transaction to prevent Merrill's collapse from becoming another catastrophic cascade through the financial system.

Bank of America agreed to pay 29 dollars per Merrill Lynch share — valuing the firm at approximately 50 billion dollars — and the acquisition was completed in January 2009. It was subsequently revealed that Merrill had incurred losses of more than 15 billion dollars in the final quarter of 2008 — information that Bank of America claimed to have received only after committing to the acquisition and that generated years of legal disputes about the adequacy of merger disclosures and the propriety of the transaction.

Building the CDO Business — Volume Before Risk

Merrill Lynch's push into collateralised debt obligations began well before the housing market turned. When Dow Kim became co-president of the firm's Global Markets and Investment Banking Group in July 2003 he was instructed to raise revenue, particularly in businesses where Merrill trailed its competitors, and he concentrated on CDOs. He recruited Chris Ricciardi from Credit Suisse, whose group had sold more CDOs than any other, and under Ricciardi Merrill climbed from fifteenth place in CDO underwriting in 2002 to second place in 2004 and again in 2005. Ricciardi left in February 2006, yet the business kept growing: in 2006 Merrill originated 38.9 billion dollars of mortgage-related CDOs against 21.3 billion dollars at the second-ranked firm, Morgan Stanley, and it ranked first again in 2007, the business having earned more than one billion dollars in fees between 2003 and 2006.

Sustaining that volume depended on Merrill absorbing what outside investors would not buy. The Financial Crisis Inquiry Commission identified three practices. The firm kept substantial portions of the CDOs it created for its own portfolio, mainly the super-senior tranches; it placed the hard-to-sell BBB-rated and other low-rated tranches of its deals into its other CDOs; and it used the cash sitting inside its synthetic CDOs to purchase tranches of other CDOs. The Commission characterised all three as repackaging riskier mortgages more attractively or buying the firm's own products when no one else would.

Merrill also changed how it protected the positions it kept. In the spring of 2006 AIG, which had already insured 9.9 billion dollars of Merrill's CDO bonds and for which Merrill was the third-largest counterparty after Goldman Sachs and Societe Generale, stopped insuring even super-senior CDO tranches. Merrill did not reconsider its strategy. It turned to the monoline insurance companies for protection instead, and from the summer of 2006, competing with Citigroup for deals, it increasingly took on super-senior positions with no insurance from AIG or the monolines at all.

Vertical Integration — Buying Into the Mortgage Pipeline

Merrill came late to the vertically integrated mortgage model that Lehman Brothers and Bear Stearns had pioneered, under which a single firm held a stake in every stage of the chain: originating mortgages, pooling the loans into securities, pooling those securities into further securities, and selling all of them to investors. In September 2006 — months after the housing bubble had started to deflate and delinquencies had begun to rise — Merrill announced that it would acquire the subprime lender First Franklin Financial Corp. from National City Corp. for 1.3 billion dollars, a purchase that puzzled analysts because the market for subprime loans was already souring.

The firm's ties to mortgage originators reached beyond First Franklin. It held a 100 million dollar ownership position in Ownit Mortgage Solutions, to which it also provided a warehouse line of credit, and it extended a line of credit to Mortgage Lenders Network. Both originators ceased operations soon after the First Franklin purchase, and Merrill seized the collateral backing its lending to them — 1.5 billion dollars from Mortgage Lenders Network and 1.2 billion dollars from Ownit.

At the end of 2006 Kim instructed his managers to sell the lower-rated tranches of the firm's CDOs and retain the super-senior tranches, believing that because the super-senior pieces were theoretically the safest, the strategy would reduce Merrill's overall credit risk. The strategy was partly involuntary: the firm could not sell the super-senior tranches at acceptable prices and had to take them into inventory to get deals done. According to an internal Merrill presentation of September 2007, the net amount held in retained super-senior tranches rose from 9.3 billion dollars in September 2006 to 28.9 billion dollars by May 2007.

The October 2007 Write-Down — Net Versus Gross Exposure

Early in 2007 the strategy still looked profitable. Merrill's net revenues of 9.9 billion dollars for the first quarter of 2007 were its second-highest quarterly results ever and included a record for the Fixed Income, Currencies and Commodities business, the business that housed the retained CDO positions. Over the summer the market value of the super-senior tranches collapsed.

On October 24, 2007 Merrill announced third-quarter results that included a 7.9 billion dollar mortgage-related write-down, made up of 6.9 billion dollars on CDOs and 1 billion dollars on subprime mortgages, contributing to a net loss of 2.3 billion dollars. It was the largest write-down on Wall Street to that point and nearly twice the 4.5 billion dollar loss the firm had warned investors to expect three weeks earlier. Six days later, on October 30, chief executive Stanley O'Neal, a twenty-one-year Merrill veteran, resigned.

With those results Merrill reported for the first time its net exposure to retained CDO positions, 15.2 billion dollars, down from a July peak of 32.2 billion dollars as the firm hedged, wrote off and sold positions. Net exposure was the amount left after subtracting the firm's hedges — guarantees, commonly in the form of credit default swaps, bought from AIG and the monoline insurers to pass the ultimate risk to third parties for a fee. On the conference call with analysts the firm's executives declined to disclose the gross exposure before those hedges. According to the Securities and Exchange Commission, by September 2007 Merrill had accumulated 55 billion dollars of gross retained CDO positions, almost four times the net figure reported on the call.

Agreement, Approval and Closing — September 2008 to January 2009

Merrill's approach to Bank of America began with its own chief executive. John Thain was among the executives reviewing Lehman Brothers' assets on the weekend of September 13 and 14, 2008; by the Saturday morning the group estimated those assets to be overvalued by 15 to 25 billion dollars, and Thain concluded that Lehman would fail and that Merrill would be next. He called Ken Lewis, the chief executive of Bank of America, the two met later that day at Bank of America's New York corporate apartment, and by the Sunday they had agreed that Bank of America would acquire Merrill for 29 dollars a share, payable in Bank of America stock.

The transaction was not set to close until the first quarter of 2009, and in the interim the two companies continued to operate as independent entities pending shareholder and regulatory approval — which is why Thain and Lewis represented their companies separately when Treasury Secretary Paulson summoned the heads of the largest banks to Washington on Columbus Day, October 13, 2008. The Federal Reserve approved the merger on November 26, 2008, noting that both companies were well capitalised and would remain so after the merger, and the shareholders of both companies approved it on December 5, 2008.

Because the consideration was Bank of America stock, what Merrill's shareholders would receive moved with the market. At the two companies' share prices when it was announced on September 15, 2008, the transaction was valued at 50 billion dollars; by the time it was completed on January 1, 2009 that value had fallen to 19 billion dollars, as the stock prices of both companies declined over the preceding three months. The combination created the world's largest brokerage and reinforced Bank of America's position as the largest depository institution in the United States.

The Material Adverse Change Clause — December 2008

After the shareholder votes Bank of America's executives began to have second thoughts. Merrill's projected after-tax loss for the fourth quarter of 2008, about 5 billion dollars in mid-November, grew to about 7 billion dollars by December 3, 9 billion dollars by December 9 and 12 billion dollars by December 14, the day Lewis said he learned that the losses had accelerated sharply. On December 17 Lewis told Treasury Secretary Paulson that Bank of America was considering invoking the material adverse change clause of the merger agreement, which would have allowed it to exit the acquisition or renegotiate its terms.

Paulson and Federal Reserve Chairman Ben Bernanke asked Lewis to stand down while they considered the situation. They concluded that invoking the clause was not a legally reasonable option: Bank of America would probably lose the litigation and remain contractually bound to buy a considerably weaker Merrill, the market would lose faith in a management that had spent months reviewing the deal, and the attempt could set off a broader systemic crisis. On December 21 Paulson reminded Lewis that the Federal Reserve, as the bank's regulator, had legal authority to replace its management and board if they embarked on a destructive strategy with no reasonable legal basis. On December 22 Lewis told his board that the government would provide assistance to protect the bank against the adverse impact of certain Merrill assets, and the board decided not to invoke the clause.

Neither Merrill nor Thain was told of these deliberations. When Thain later learned of them he doubted the clause could have succeeded: it had been heavily negotiated and specifically excluded market moves, and in his view nothing had happened to Merrill in the fourth quarter other than the market move. Congressman Edolphus Towns of New York would later call the merger a shotgun wedding.

Government Support Tied to the Merrill Assets

Bank of America's capital from the Troubled Asset Relief Program was linked to the acquisition from the start. Treasury committed 25 billion dollars to the bank but would invest the full amount only once the Merrill acquisition was complete: the bank received 15 billion dollars in October 2008 and, on January 9, 2009, the further 10 billion dollars that had been allocated to Merrill Lynch.

On January 16, 2009 — the day Bank of America disclosed that Merrill had recorded a 15.3 billion dollar net loss for the fourth quarter on real estate-related write-downs and charges — the Treasury, the Federal Reserve and the FDIC announced a further package. Treasury invested 20 billion dollars from the Troubled Asset Relief Program in preferred stock carrying an 8 percent dividend, and the government agreed to protect the bank against unusually large losses on a pool of about 118 billion dollars of loans, real estate-backed securities and related derivatives, the large majority of which Bank of America had assumed by acquiring Merrill. The assets remained on Bank of America's balance sheet, ring-fenced. The bank would absorb the first 10 billion dollars of losses and the government 90 percent of losses beyond that, with the Federal Reserve ready to backstop the residual risk through a non-recourse loan. As the fee, the bank issued preferred stock and warrants to the government, and it accepted conditions including a cap on its common dividend of one cent a share per quarter for three years without the government's consent.

On May 6, 2009 Bank of America asked to exit the arrangement, having concluded that losses on the pool would not exceed the 10 billion dollars it was required to absorb itself. It was allowed to terminate, but only after compensating the government for the benefit it had received from the market's perception that the government would insure its assets: on September 21, 2009 it agreed to pay a 425 million dollar termination fee, shared among the Treasury, the Federal Reserve and the FDIC.

What Bank of America Knew — The Disclosure Dispute

Whether Bank of America knew the scale of Merrill's fourth-quarter losses before its shareholders voted became a lasting dispute. In a January 2009 conference call Lewis and chief financial officer Joe Price told investors that the bank had not been aware of the extent of the losses at the time of the December 5 vote, attributing them not to any failure to identify the troubled assets but to a deterioration in mid- to late December that the bank had not expected. Thain contested that account: Merrill, he said, had provided daily profit and loss reports to Bank of America, so the bank's executives should have known of the losses as they occurred.

The Securities and Exchange Commission brought an enforcement action against Bank of America, charging that it had failed to disclose about 9.5 billion dollars of known and expected Merrill Lynch losses before the December 5 shareholder vote and had thereby deprived shareholders of material information critical to their ability to evaluate the merger fairly. In February 2010 Bank of America paid 150 million dollars to settle the action.

Regulators had their own reasons to have the January support ready when the results were published. They feared that weak fourth-quarter earnings could bring the combined bank liquidity problems: 384 billion dollars of its repo and securities-lending funding was rolled over every night, Merrill's legacy businesses funded a further 144 billion dollars overnight, and a one-notch downgrade of the new Bank of America's credit rating would contractually oblige it to post 10 billion dollars of additional collateral. They therefore wanted the details of government support announced together with the bank's fourth-quarter results. Even so, Bank of America's stock closed down almost 14 percent on January 16, 2009.

Merrill Today — The Wealth Management Division

Merrill Lynch and Co. was merged into Bank of America Corporation in October 2013 — ceasing to exist as a separate legal entity after nearly a century of independent operation. The broker-dealer subsidiary Merrill Lynch, Pierce, Fenner and Smith Incorporated continues to operate as a FINRA member firm and the primary registered broker-dealer through which Merrill's wealth management and brokerage operations are conducted.

In 2019 Bank of America rebranded the wealth management business simply as Merrill — dropping the Lynch name that had been part of the firm's identity for over a century.

The Merrill business today operates three principal client channels — Merrill Lynch Wealth Management serving affluent and high-net-worth clients through the traditional financial adviser model, Merrill Private Wealth Management serving ultra-high-net-worth clients with complex financial needs, and Merrill Edge providing a digital self-directed investing platform for mass-market retail investors.

The financial advisers of Merrill Lynch, Pierce, Fenner and Smith — as registered representatives of a FINRA member broker-dealer — are subject to FINRA Rule 2111 suitability requirements and Regulation Best Interest when making recommendations to retail customers, the same standards that govern broker-dealer conduct throughout the securities industry they helped build over more than a century.