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The rise and ruin of 'Mother Merrill'

Rajiv Shirali 

How Merrill Lynch Revolutionised the Financial World
Winthrop H Smith Jr with William Ecenbargertesting.. we are here....
John Wiley & Sons
600 pages; Rs 599

In August 1974 Winthrop Smith Jr joined Merrill Lynch & Co -- which his late father, Winthrop Smith Sr, had co-led for 21 years -- as an entry-level investment banking associate and, by 2001, had become executive vice president of the firm and chairman of Merrill Lynch International, its global arm. But in October that year Mr Smith decided to end his Wall Street career to start a ski resort, because he believed that Stanley O’Neal, the new president who would later go on to become CEO, neither understood the principles that defined the firm, nor appreciated the culture and values that had made it Wall Street’s largest brokerage house.

He also resolved to write the story of Merrill Lynch. The result is Catching Lightning in a Bottle, the first complete history of the firm, from the day Charles Merrill opened shop in January 1914, to the final shareholder meeting in December 2008, following the firm’s shotgun wedding with Bank of America on September 14, 2008, amidst doubts whether it would survive even a day longer. (Lehmann Brothers collapsed the next day.) The book, which traces the firm’s growth and evolution from a partnership to a private corporation to a public company, has been co-authored by William Ecenbarger -- a Pulitzer Prize winner hired in the late 1990s to write the firm’s corporate history, who was told by Mr O’Neal to drop the project when he became CEO.

The story of ML’s rise and eventual fall is told through the contributions of its leadership. The chapters are organised around the 12 leaders of the firm, starting with Charles Merrill (and his first partner Edmund Lynch, who died an early death in 1938 and had little lasting impact on the firm), and ending with John Thain, a Goldman Sachs veteran who had turned the New York Stock Exchange around, and who took over as the first external CEO in December 2007, following O’Neal’s forced departure. The book describes how Charles Merrill democratised investing by enabling countless middle-class individuals to save and invest. Indeed, “bringing Wall Street to Main Street” is a phrase that Mr Smith uses again and again.

Mr Smith has made skilful use of anecdotes to tell a gripping tale, based on interviews with hundreds of former colleagues who shared their experiences with him. It is not an “objective” account, but a personalised memoir. He has set out to capture ML’s contribution -- and therefore that of Charles Merrill as well as his own father, who played no small role in building up the firm -- to the development of the US securities business. As the man who thought of himself as a guardian of ML’s cultural values, Mr Smith pours vitriol on Mr O’Neal, who ran ML into the ground.

He stresses the nurturing culture at ML (which gave rise to the expression “Mother Merrill”), where executives mentored those who reported to them, staff were treated humanely, and where the succession was always smooth, with the president of the firm moving up into the CEO’s position when the incumbent retired. According to his telling, Mr O’Neal -- who came from General Motors in 1986 and was the first African-American to head a major Wall Street firm -- struck the only discordant notes. He was ill at ease with ML’s clubby culture (its senior executive hierarchy was dominated by Irish-Americans), dissatisfied with the modest profit margins earned from the retail brokerage business, and wanted to exorcise incompetence and nepotism, which he thought were rampant.

Mr O’Neal downsized ruthlessly, sacking thousands of executives without ceremony when he was still president of the firm. Mr Smith tells us he decided to “retire” when Mr O’Neal practically invited him to be part of an effort to force David Komansky out, at a time when the latter was still chairman and CEO, and therefore Mr O’Neal’s boss -- with nearly two years to go before retirement. Mr Smith does not spare Mr Komansky either, charging that he took a back seat and allowed Mr O’Neal to usurp his authority, thus laying the foundation for problems that were to come later.

Worst of all, writes Mr Smith, Mr O’Neal -- focused as he was on maximising short-term profits -- plunged headlong into the purchase of toxic subprime assets and collaterised debt obligations. For a while these risky bets worked to ML’s advantage, and net profits soared from $2.5 billion in 2002 to $7.5 billion in 2006. But when the US housing market collapsed, ML chalked up the worst losses in its history -- $19.2 billion between July 2007 and July 2008. “Thain desperately tried to purge the firm of its toxic assets, selling some $31 billion in mortgage assets for pennies on the dollar”, writes Mr Smith. “But our great company was beyond fixing.”

Incensed that Mr O’Neal destroyed the ML culture, and then the firm itself, Mr Smith is repetitive in attributing culpability. Margins in the brokerage business were being relentlessly squeezed by competition, and Mr Smith does not consider the possibility that another CEO may have acted similarly. Almost all US financial firms lost money heavily on mortgage-backed securities; ML stood out only because its losses exceeded those of the others. However, Mr Smith makes the valid point that if the company failed to rebound when the markets recovered, it was only because Mr O’Neal had wielded the axe on ML’s traditional businesses in 2001.

He concedes that Mr O’Neal was a highly effective CFO who strengthened ML’s liquidity position in the late 1990s. But as an increasingly autocratic CEO, he ignored both ML’s chief economist and its leading authority on mortgage-backed securities when they issued warnings about the precarious state of the US housing market. When, in late October 2007, Mr O’Neal realised the magnitude of ML’s losses, he approached Wachovia Bank to discuss a merger. The furious board fired him two days later, because it had authorised no such merger discussions and because the media got hold of the story, undermining ML’s credibility -- not because of his flawed investment strategies.

Catching Lightning in a Bottle skillfully captures the genius of Charles Merrill, and the manner in which he laid the foundations of the nurturing “Mother Merrill” culture, which especially emphasised teamwork, respect for the individual and integrity. Equally, it highlights the damage that can be caused by a CEO who subverts a culture that has served a company well -- as Stanley O’Neal did, ending Merrill Lynch’s existence as a legal entity six years short of its centenary. It also shows what can result when a company’s board abdicates its oversight responsibilities and fails to intervene in circumstances that may warrant intervention in the interests of the shareholders.

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First Published: Thu, September 01 2016. 21:30 IST