Sunday, January 27, 2008

History Modern Merrill Lynch

In 1940 Merrill Lynch, E. A. Pierce & Cassatt opened its doors, dropping the comma between Merrill and Lynch for the first time and adding Cassatt, a Philadelphia firm that had sold part of its business to Pierce and part to Merrill, Lynch in 1935.
The new firm was devoted to the research and education. The Clients were urged to research their financial options, and Merrill Lynch saw itself as a partner in that process, even providing educational materials.

In 1941 the firm merged again to become Merrill Lynch, Pierce, Fenner & Beane as it absorbed Fenner & Beane, a New Orleans company that was the nation's largest commodities house and the second-largest "wire house" (an investment firm that depended on its private telegraph wires for a broad-based business).
Throughout the bull market of the postwar period and the 1950s, Merrill Lynch continued to be an innovator and a popularizer of financial information. The firm erected a permanent Investment Information Center in Grand Central Station, distributed educational brochures, ran ads with titles like "What Everybody Ought to Know About This Stock and Bond Business," and even sponsored investment seminars for women. These new ideas made Merrill Lynch the best-known investment firm of the day.

Due to the various innovations introduced by him, Charles Merrill's reputation soared to such heights that shortly before his death in 1956 one Wall Street historian referred to him as "the first authentically great man produced by the financial markets in 50 years."
In 1958 the firm’s name changed again. Beane’s name was dropped, and as Winthrop Smith had taken over as directing partner two years earlier, the firm was renamed Merrill Lynch, Pierce, Fenner & Smith (ML). The next year it became the first large Wall Street firm to incorporate. In 1959, earnings reached a record high of $13 million.
During the 1960s the company began to diversify and expand internationally. In 1964 Merrill Lynch entered the government-securities business when it acquired C. J. Devine, the nation's largest and most prestigious specialist in that market. Over the course of the decade the firm also entered the fields of real estate financing, asset management, and economic consulting, and added 20 new overseas offices. The company paid special attention to establishing a European presence, which allowed participation in the developing Eurobond market.

In 1964 had succeeded in becoming the first U.S. securities firm in Japan. In that same year ML was named lead underwriter for the $100 million public offering of Comsat, builder of the world's first telecommunications satellite, thus solidifying its position as one of the USA’s major investment-banking firms. The company underwrote the sale of Howard Hughes's TWA stock in 1965, and in the next ten years added significant new business with firms such as Commonwealth Edison, Fruehauf, and Arco. By the end of the decade Merrill was managing about $2 billion annually in such offerings.
A 1966 debenture issue for Douglas Aircraft, led to an investigation by the Securities and Exchange Commission (SEC) and a substantial rewriting of the regulations governing full-service investment firms like ML. SEC took the opportunity to tighten its rules regarding insider trading and the prevention of unwarranted intraoffice disclosures.
Net income in 1967 was $55 million, representing an increase of 300 percent during the previous eight years.

In 1968, Donald T. Regan was named president of Merrill Lynch, and two years later he became chairman and CEO. Regan guided ML in an ambitious program of diversification aimed at making the company a "one-stop investment and estate-planning institution." This included ML's first determined entry into the real estate field with the 1968 acquisition of Hubbard, Westervelt & Motteley, enabling it to offer to customers a range of mortgages, leasebacks, and other options; a major move into the mutual fund markets; and the purchase of Royal Securities Corporation of Canada, significantly strengthening ML's position in that country.
The firm also absorbed the New York Stock Exchange's fifth-largest brokerage house, Goodbody & Company, in 1970. The company fell victim to Wall Street's so-called "paper crunch disaster." Overextended trading houses were generating more transaction records than their accounting departments could keep up with, resulting, in the case of Goodbody and many others, in massive confusion and eventual collapse. ML acquired the firm at the end of 1970. The bailout cost little and brought ML new expertise in the area of unit trusts and options trading.
In 1971 Merrill Lynch became the second member of the New York Stock Exchange to invite public ownership of its shares, and in July of that year became the first to have its own shares traded there. Shortly thereafter, the company adopted its most recent change of name, forming a holding company called Merrill Lynch & Co., Inc., with Merrill Lynch, Pierce, Fenner & Smith as its principal subsidiary.

Regan's diversification program continued with a 1972 move into international banking. London-based Brown-Shipley Ltd. soon became Merrill Lynch International Bank, and in 1974 ML acquired the Family Life Insurance Company of Seattle, Washington. In 1976 ML formulated a strategy to meet the challenge of the increasingly complex international financial marketplace by offering "a diversified array of securities, insurance, banking, tax, money management, financing, and financial counseling."

Formerly clear demarcations between the various money professions were rapidly blurring. ML demonstrated it in 1977 when it announced the creation of the Cash Management Account (CMA). This unique account allowed individual investors to write checks and make Visa charges against their money market funds. Banks mounted a number of legal campaigns to stop it, to no avail. By 1989, fully half of ML's $304 billion in customer accounts were placed in CMAs, and most of the other leading brokerage houses had developed similar integrated-investment vehicles.

Despite its sustained attempt to achieve a steady level of profit through diversification, ML's earnings have reflected the volatile nature of its core securities business. For example, 1971 profit reached a new high of $70 million, but was followed by the difficult oil-embargo years of 1972--74; and while 1975's record $100 million was not equaled for several years afterward, 1980 saw record highs of $218 million in profit and $3 billion in revenues.
In 1980, U.S. President Ronald Reagan named Donald T. Regan secretary of the treasury and later made him White House chief of staff.
Roger Birk became the company's new chairman and CEO, followed in 1984 by William A. Schreyer.

Schreyer, unhappy with ML's failure to match the earnings of some of its more flamboyant competitors, made increased profitability his chief goal. To that end, Schreyer reorganized the vast company, strengthened its trading, underwriting, and merger and acquisition departments, and made a $1 billion move into new offices in the World Financial Center. The firm also cut spiraling operating costs and trimmed 2,500 employees from its ranks.
In 1985 ML met a longstanding goal when it became one of the first six foreign companies to join the Tokyo Stock Exchange. The following year, when the firm became a member of the London Exchange, ML was able to offer round-the-clock trading.
In 1986 ML sold its real estate brokerage unit as part of Schreyer's plan to unload low-profit concerns so that the company could focus more on using its powerful retail divisions to sell the securities its investment-banking department brought in. The strategy worked; profits increased to a record $453 million during that year.
Also in 1986, scandal hit when Leslie Roberts, a 23-year-old Merrill Lynch broker, was arrested by the FBI for mail fraud. Roberts's complex fraud scheme lost huge sums, as much as $10 million from a single investor's account. The Roberts case typified for many the money fever of pre-crash Wall Street, and the incident attracted international attention.
Then in April 1987, the company was caught speculating in hugely unsuccessful fashion when it lost $377 million trading mortgage-backed securities--the largest one-day, one-company trading loss in Wall Street history.

Coupled with the crash of October 1987, profits were sent reeling and ML was forced to freeze salaries, cut bonuses, dismiss employees, and slash commission payouts to its sales force.
But profits increased dramatically the next year 1988, reaching a record high of $463 million. During 1988 ML achieved a long-held goal when it edged out Salomon Brothers to become the largest underwriter in America. In 1989, ML reached another peak: the firm became the world leader in debt and equity securities, this time besting First Boston Corporation in the race for the top spot. Merrill Lynch was active in merger-and-acquisition business as well. It earned $90 million for helping put together the $25 billion leveraged buyout of RJR Nabisco Inc. that year.
Although Merrill Lynch's revenue and assets under management grew steadily from 1988 to 1990, its return on equity continued to lag behind other firms in the industry. Observers in particular cited the company's traditional inability to control costs. Schreyer embarked on an ambitious reorganization which created 18 operating divisions, the managers of which were accountable for all costs therein. ML also downsized, reducing its head count from 48,000 in 1989 to 37,000 in 1991 and eliminating unprofitable subsidiaries such as Merrill Lynch Realty, Inc. and its clearing service Broadcort Capital Corp. It made additional cuts in its non-U.S. operations. Schreyer's overall cost-containment program paid off by reducing costs $400 million dollars from 1989 to 1991.

Perhaps most importantly, however, Schreyer changed the mind-set of the company from an obsession with generating revenue to a focus on earning profits. Compensation programs tied to the production of revenue were scrapped to make room for new schemes based on return on equity (ROE). Schreyer set an overall company goal of 15 percent ROE, and held ML divisions to this standard as well. As a result, Merrill Lynch's ROE figures improved dramatically in the early 1990s--5.8 percent in 1990, 20.8 percent in 1991, 22 percent in 1992, and 27.3 percent in 1993. This achievement came along with growth. From 1990 to 1993, gross revenues increased from $11.15 billion to $16.59 billion, while assets under management increased from $110 billion to $161 billion. In the midst of this success, Schreyer retired in 1993.
Daniel P. Tully became Chairman and CEO, who had been president and COO till that time.
By 1994 ML had perhaps achieved a long-held goal of diversification to such a degree that it could achieve an average ROE of 15 percent across business cycles. Other firms in the industry struggled in 1994 as a series of U.S. Federal Reserve interest rate hikes battered the bond market and reduced underwriting dramatically. Merrill Lynch--though its profits were down significantly in the second, third, and fourth quarters--still managed a ROE of 18.6 percent for the year on record gross revenues of $18.23 billion. Since the company had the ability to offer its customers a full range of financial services and investment opportunities, it could generate revenues--and profits--in all types of market environments. ML's continuing growth in the global market--highlighted in 1994 by its first-time leadership in Eurobond and global bond underwriting--also promised to help the firm overcome downturns in the economies of individual countries or regions.

Orange County, California, was forced to file for bankruptcy late in 1994 after losing nearly $2 billion in a $7.6 billion county investment fund. Throughout the 1990s, the Orange County treasurer had leveraged the fund in order to purchase securities that would increase sharply if interest rates fell. The scheme worked very well until the 1994 Federal Reserve rate hikes sent the fund's securities into a tailspin. The county subsequently sued ML for $2 billion, claiming that the firm had advised the treasurer to make investments that exceeded state-mandated limits on risk. Merrill Lynch denied that it had done anything wrong, and claimed that it had not been the treasurer's financial adviser.
In mid-1995 Merrill Lynch became the largest investment bank in the world in terms of equity sales, trading, and research through its acquisition of England's biggest independent securities firm, Smith New Court PLC. Merrill Lynch paid $842 million for the purchase. It not only increased its presence in England but also gained businesses in several countries where it had none, such as South Africa, Malaysia, and Thailand. The acquisition thus brought further geographic diversification to Merrill Lynch's operations.;-Co-Inc-Company-History.html

Friedman, Jon, "The Remaking of Merrill Lynch," Business Week, July 17, 1989, pp. 122--25.
Hecht, Henry, ed., A Legacy of Leadership: Merrill Lynch 1885--1985, New York: Merrill Lynch, 1985, 151 p.
Regan, Donald T., The Merrill Lynch Story, New York: Newcomen Society in North America, 1981, 22 p.

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