Merrill Lynch bites the dust


Richard Moore

Stunning Fall for Main Street’s Brokerage Firm

September 15, 2008

It’s the end of an era for Merrill Lynch, the brokerage firm that brought Wall Street to Main Street.

Merrill, which has lost more than $45 billion on its mortgage investments, agreed to sell itself to Bank of America for $50.3 billion in stock, according to people briefed on the negotiations.

It is a remarkable fall from grace for the 94-year-old Merrill, whose corporate logo — a bull — has long symbolized the fundamental optimism of Wall Street. After a frantic weekend of talks between Wall Street executives and federal officials over the fate of the teetering Lehman Brothers, fear spread on Sunday that Merrill, staggered by losses, might also falter. The merger would combine Bank of America’s banking and lending strength with Merrill Lynch’s wealth management expertise.

“It is an enormous shock,” said Steve Fraser, a Wall Street historian and author of “Wall Street: America’s Dream Palace.”

“Merrill was a kind of bedrock institution whose stability and longevity was taken for granted and was reassuring to people,” Mr. Fraser said. “Even in these very highly erratic and speculative marketplaces like we’ve been living through, you didn’t think Merrill would be vulnerable.”

The sale, if completed, would open a new chapter for Merrill, which was founded in 1914 and promoted the idea that anyone, not just the rich, should invest in markets. Merrill’s brokers would be combined with Bank of America’s smaller group of wealth advisers into an entity called Merrill Lynch Wealth Management, these people said. Customers with brokerage accounts at Merrill are unlikely to be financially affected.

Merrill, the nation’s largest brokerage firm, was one of the earliest Wall Street firms to go public, in 1971. Its executives, traditionally former stockbrokers, have long been viewed as spokespeople for the entire industry. After the crash of 1987, for instance, Merrill’s chief executive appeared on a television commercial and used one of the company’s long-time slogans, saying: “Merrill Lynch is still bullish on America.”

Last December, John A. Thain, Merrill’s chairman and chief executive, was brought in to try to salvage the troubled company. It remains unclear how many Merrill employees will be hired by Bank of America.

Since the credit crisis first flared more than a year ago, Merrill has been among the most wounded. Under its previous chief executive, E. Stanley O’Neal, Merrill moved aggressively into the mortgage market and became one of the top issuers of investment vehicles linked to subprime mortgages and other risky forms of debt. Mr. O’Neal was forced out last fall after the tumult in the mortgage market began.

Since then, the investment bank has taken more than $45 billion in write-downs, a figure that is two times more than all the profit Merrill made in the two and a half years before the credit crisis. The charges have pushed Merrill Lynch deep into the red and forced the company to lay off 4,000 workers. Merrill has raised more than $15 billion in additional capital to strengthen its financial position but has struggled to regain investors’ confidence.

Employees reached Sunday night reacted with dismay and said they would consider leaving after Bank of America took over. Many said they were saddened that Merrill, which has long prided itself on its independence, would now become part of a larger commercial bank.

“A hundred guys flew this firm into a mountain,” said a broker who works for Merrill in California and asked to remain anonymous because he did not have permission to speak with reporters. “It’s really sad. Now we’re going to be a bank like every one else.”

Many employees hoped that Mr. Thain would turn the company around. A former Goldman Sachs executive, Mr. Thain is known as Mr. Fix-It because he pushed the New York Stock Exchange into the modern era as its chief executive over the last two years.

Mr. Thain undertook seven major transactions this summer in hopes of bolstering Merrill. Among the transactions were a sale of Merrill’s $4.4 billion stake in Bloomberg, the financial news and data service. Merrill also raised $9.8 billion of common equity and shed $31 billion of its risky mortgage investments for pennies on the dollar.

Explaining his decisions in an interview in July, Mr. Thain pointed to employee morale and said Merrill needed to move beyond its past.

“We have over 60,000 people working every day,” Mr. Thain said. “All the efforts of these people were overwhelmed by the write-downs in the mortgage-related assets.”

Merrill Lynch has been through tough times before. As the stock market soared in the 1920s, Charles E. Merrill, one of the company’s founders, worried about speculation and advised his clients that they should “take advantage of present high prices and put your financial house in order.” After the stock market crash of 1929, Merrill survived in large part by spinning off its retail brokerage business and focusing on investment banking. The company later reunited.

Many Americans remained skeptical of Wall Street even into the 1950s, and Merrill Lynch used its marketing and local branches to try to build a better reputation for the industry. At the same time it began expanding into Europe. In the 1990s, Merrill was the first financial services company to surpass $1 trillion in client assets under management, according to the company’s Web site.

The new, combined group, Merrill Lynch Wealth Management, would be run by Robert J. McCann, the head of Merrill’s global wealth management business. Gregory J. Fleming, president of Merrill Lynch, will become president of the combined bank’s corporate and investment bank, while Thomas K. Montag, who started at Merrill Lynch in August, will be head of all risk, trading and institutional sales, the people briefed on the negotiations said.

Merrill’s top executives had long believed the company would survive the turmoil in the markets, but changed their minds this weekend. Some observers said they may have been wise to do so.

“Almost all of these institutions are worth a lot more while they’re still operating and before they get caught in a financial hurricane,” said James A. Wilcox, a professor at the Haas School of Business at University of California in Berkeley and a former chief economist at the Office of the Comptroller of the Currency.

As recently as last Wednesday, Mr. Thain was still out selling the Merrill story. He met with worried employees financial advisers in Minneapolis as part of a series of town halls he has been holding to answer employee questions. Mr. Thain reassured them about the company’s capital base, dwindling level of worrisome assets, and the value of Merrill Lynch’s businesses, according to someone who attended.

And he told them that the pain looked like it would end by 2009.

Jenny Anderson and Andrew Ross Sorkin contributed reporting.