Merrill Lynch & Co.

Merrill Lynch & Co.
	File:Merrill Lynch logo.svg Merrill Lynch logo
Company type	Public (until 2009)
Industry	Investment banking, financial services
Founded	January 6, 1914; 112 years ago in New York City, United States
Founder	Charles E. Merrill
Defunct	January 2009
Fate	Acquired by Bank of America; merged into BofA Securities
Headquarters	New York City, United States
Area served	Worldwide
Key people	Michael G. Ricciardi (leader of private equity funds division)
Products	Prime brokerage, broker-dealer services, investment banking, wealth management
Number of employees	15,000 financial advisors (not total employees)
Parent	Bank of America (from 2009)

Merrill Lynch & Co., originally known as Merrill Lynch, Pierce, Fenner & Smith Incorporated, was an American investment bank publicly traded and operating autonomously from its inception in 1914 until its acquisition by Bank of America in January 2009. Following the purchase, it was merged into BofA Securities.

Specializing in prime brokerage and broker-dealer operations, the company was headquartered at 250 Vesey Street, New York City. The acquisition agreement with Bank of America was reached on September 14, 2008, during the turmoil of the 2008 financial crisis, coinciding with the downfall of Lehman Brothers. The deal closed in January 2009, with full integration into Bank of America Corporation completed by October 2013.

Founding and early history

The firm was established on January 6, 1914, by Charles E. Merrill under the name Charles E. Merrill & Co., located at 7 Wall Street, New York City. After Edmund C. Lynch joined in 1915, it was renamed Merrill, Lynch & Co. The comma was removed from the name in 1938. Winthrop H. Smith became part of the company in 1916. Later, Michael G. Ricciardi took leadership of Merrill Lynch’s private equity funds division.

In 1921, Merrill Lynch acquired Pathé Exchange (which later became RKO Pictures), and in 1926 gained controlling shares in Safeway Inc., which expanded to become the third largest grocery chain in the United States by the early 1930s.

In 1930, a restructuring occurred where Merrill spun off its retail brokerage segment to E. A. Pierce & Co., shifting focus toward investment banking. This transition included most personnel such as Lynch and Smith; Merrill retained a minority stake in E.A. Pierce. Throughout the 1930s, E.A. Pierce grew to be the largest brokerage firm in the U.S., pioneering use of IBM machines for record maintenance and managing an extensive private telegraph system for transmitting orders.

Despite its market dominance, E.A. Pierce struggled financially with limited capital during this period. Following Lynch’s death in 1938, merger talks between Smith and Merrill resulted in combining Merrill Lynch with E.A. Pierce and Cassatt & Co., finalized on April 1, 1940; initially named Merrill Lynch, E.A. Pierce, and Cassatt. In 1941, it became the first Wall Street firm to release an annual financial report publicly.

That same year, Merrill Lynch merged with Fenner & Beane—a New Orleans-based investment bank and commodities company that had been the second largest securities firm nationally during the 1930s—forming Merrill Lynch, Pierce, Fenner & Beane, establishing itself as the top securities brokerage firm across the country.

Post-war years

In 1952, Merrill Lynch & Co. was created as a holding company and formally incorporated after nearly five decades functioning as a partnership. On December 31, 1957, The New York Times noted that the firm's renaming honored Winthrop H. Smith’s leadership since 1940. The merger resulted in Merrill Lynch, Pierce, Fenner & Smith Inc., which became the world’s largest securities firm with offices spanning more than 98 cities and memberships on 28 exchanges. On March 1, 1958, it gained membership on the New York Stock Exchange under this new designation.

In 1964, following Christopher J. Devine's death in 1963, Merrill Lynch acquired C. J. Devine & Co., a prominent dealer specializing in U.S. Government Securities. This acquisition led to the formation of Merrill Lynch Government Securities Inc., substantially enhancing its government securities business segment. This division played a crucial role in developing innovative money market instruments and government bond mutual funds that propelled growth through the 1970s and 1980s.

End of the 20th Century

Prior to divesting its subsidiary to CIBC Wood Gundy in 1990, Merrill Lynch collaborated with Canadian partners in retail investment. The firm made a return to the Canadian market by acquiring Midland Walwyn Inc in June 1998, aiming to capitalize on Canada's extensive personal investment sector. Nevertheless, by December 2001, Merrill Lynch sold Midland Walwyn back to CIBC Wood Gundy.

In 2003, Merrill Lynch acquired a 7.54% stake in Japanese animation company TMS Entertainment, becoming its second-largest shareholder. This investment was purely financial, with no intention of assuming managerial control.

Emergence as a Leading Firm

Merrill Lynch achieved significant recognition through its extensive network of 15,000 financial advisors, famously dubbed the "thundering herd," which allowed it to place securities it underwrote directly. Unlike competitors such as Morgan Stanley, which depended on independent brokers, Merrill Lynch retained a substantial internal sales team. Known as the "Catholic" firm on Wall Street until 1970, the company went public in 1971 and evolved into a global corporation managing over $1.8 trillion in client assets across more than 40 countries. In 1977, it launched the Cash Management Account (CMA), integrating money market mutual fund sweeps with check-writing and credit card functionalities. The acquisition of White Weld & Co. in 1978 further bolstered its securities underwriting division. Merrill Lynch earned a reputation for its Global Private Client services and strong sales performance.

Orange County Resolution

Merrill Lynch agreed to a $400 million settlement with Orange County, California to resolve allegations that it sold high-risk investments to county treasurer Robert Citron, whose losses precipitated the county's 1994 bankruptcy. This settlement was part of a larger recovery effort amounting to approximately $600 million from various defendants, with Merrill Lynch settling without admitting fault in 1998.

Impact of the Subprime Mortgage Crisis

In November 2007, Merrill Lynch revealed $8.4 billion in write-downs connected to the subprime mortgage crisis and replaced CEO E. Stanley O'Neal with John Thain. Thain overhauled senior management and recruited former New York Stock Exchange colleagues including CFO Nelson Chai and communications director Margaret D. Tutwiler. The company divested its commercial finance division to General Electric and raised over $6 billion by issuing shares to Singapore’s sovereign wealth fund, Temasek Holdings.

By July 2008, Merrill Lynch reported fourth-quarter losses of $4.9 billion due to mortgage defaults and poor investments, accumulating $19.2 billion in losses over the preceding year. To mitigate risk exposure, it sold certain hedge funds and securities while Temasek increased its stake by an additional $3.4 billion.

In August 2008, New York Attorney General Andrew Cuomo threatened legal proceedings against Merrill Lynch for allegedly misrepresenting risks associated with mortgage-backed securities. The firm proposed repurchasing $12 billion in auction-rate debt and halted hiring after revealing nearly $30 billion in losses at its UK subsidiary. CEO Thain committed to buying back auction-rate securities from smaller investors starting October 2008.

On September 5, 2008, Goldman Sachs downgraded Merrill Lynch’s stock rating to "conviction sell," citing expectations of further financial setbacks. Bloomberg reported that total losses on mortgage-backed securities during this period reached $51.8 billion for the firm.

Controversies Surrounding CDOs

In the early 2000s, Merrill Lynch, similar to numerous other financial institutions, became deeply engaged in the market for mortgage-backed collateralized debt obligations (CDOs). The firm’s prominence in this sector was established in 2003 when Christopher Ricciardi transferred his CDO team from Credit Suisse First Boston to Merrill. By 2005, Merrill promoted itself as the leading global underwriter of CDOs for the previous year. To secure mortgage assets for these CDOs, Merrill acquired First Franklin Financial Corp., a significant subprime mortgage lender, in December 2006. Throughout 2006 and 2007, Merrill underwrote 136 CDO deals totaling $93 billion. However, by late 2007, the value of these instruments plummeted sharply, and Merrill’s retention of portions of these securities led to multibillion-dollar losses. In mid-2008, Merrill disposed of a portfolio of CDOs originally valued at $30.6 billion, selling them to Lone Star Funds for $1.7 billion in cash plus a $5.1 billion loan.

In April 2009, bond insurer MBIA initiated legal action against Merrill Lynch, accusing the firm of fraud and other breaches related to credit default swap agreements on four mortgage-backed CDOs. MBIA contended that Merrill misrepresented the quality of these intricate CDOs to obtain insurance coverage while concealing underlying defects. Most allegations were dismissed by 2010 except MBIA’s breach of contract claim asserting that Merrill overstated the AAA ratings of the CDOs. As the value of these securities deteriorated, MBIA owed substantial sums to Merrill; however, Merrill contested MBIA’s assertions.

Also in 2009, Rabobank filed a lawsuit against Merrill concerning a CDO called Norma, drawing parallels to the SEC’s fraud allegations against Goldman Sachs’ Abacus CDO transactions. Rabobank alleged that hedge fund Magnetar Capital selected assets for Norma while simultaneously betting against them—a fact Merrill failed to disclose—and falsely claimed that NIR Group was responsible for asset selection. Following the collapse of this CDO, Rabobank owed considerable amounts to Merrill. Merrill refuted these accusations, emphasizing that the cases were unrelated and denying any wrongdoing.

Acquisition by Bank of America

Merrill Lynch’s substantial losses from an extensive and unhedged mortgage portfolio tied to collateralized debt obligations severely undermined confidence among trading partners regarding its financial stability and ability to secure refinancing, ultimately leading to its sale. During the week beginning September 8, 2008—amid intense liquidity crises affecting Lehman Brothers and widespread fears of contagion among investment banks—Bank of America initiated negotiations to purchase Merrill Lynch for $38.25 billion in stock. The transaction was finalized on September 14, 2008, with Bank of America issuing roughly $50 billion worth of shares—equivalent to 0.8595 shares per share of Merrill Lynch—reflecting a 70.1% premium over Merrill’s closing price on September 12 and a 38% premium relative to its book value of $21 per share; however, this price remained a 61% discount compared to its peak valuation in September 2007.

Testimony before Congress by Bank of America CEO Kenneth Lewis and internal communications revealed that federal authorities exerted pressure on Bank of America to proceed with the merger, threatening management replacement as a prerequisite for government assistance. In March 2009, reports surfaced indicating that Merrill Lynch received billions through insurance deals with AIG, including $6.8 billion derived from U.S. taxpayer funds allocated during AIG’s bailout.

Post-merger with Bank of America

Following the integration of Merrill Lynch, Bank of America maintained operations of Merrill Lynch's wealth management segment while consolidating its investment banking activities into the newly established entity, BofA Securities.

Analyst Research settlement

In 2002, Merrill Lynch incurred a $100 million penalty for issuing deceptive research reports. The resolution mandated enhanced transparency and measures to separate research functions from investment banking operations.

Analyst Henry Blodget faced civil securities fraud charges in 2003 due to discrepancies between his private emails and public stock evaluations. He reached a settlement without admitting guilt, was prohibited from participating in the securities industry, and paid $4 million in fines and disgorgement.

CEO David Komansky publicly acknowledged the firm's shortcomings in adhering to professional research standards.

Enron/Merrill Lynch Nigerian barge

In 2004, convictions involving Merrill Lynch executives represented the sole criminal indictments against bank personnel in connection with the Enron scandal. The matter concerned a 1999 transaction where Merrill Lynch acquired Nigerian energy barges from Enron in a contrived sale, enabling Enron to record approximately $12 million in illicit profits.

Conspiracy and fraud charges were brought against four former Merrill executives alongside two Enron officials. Merrill Lynch responded by terminating implicated bankers, consenting to external supervision over structured finance activities, and settling SEC civil fraud allegations without admitting liability.

Discrimination charges

On June 26, 2007, the U.S. Equal Employment Opportunity Commission filed suit against Merrill Lynch alleging discrimination against Dr. Majid Borumand due to his Iranian heritage and Islamic religion, accusing the firm of "reckless disregard" for civil rights with intentional malfeasance.

Separately, a NASD arbitration panel awarded $1.6 million to former Iranian employee Fariborz Zojaji after ruling his termination was ethnically motivated. These cases attracted criticism from the National Iranian-American Council and the American-Arab Anti-Discrimination Committee.

Despite these controversies, Merrill Lynch earned recognition for diversity: ranked among the top 10 companies for LGBT employees by Diversity Inc. in 2008; named second-best U.S. employer for individuals with disabilities by Diversity Magazine in 2007; and rated No.1 U.S. firm for "Diverse College Graduates" by Diversity Edge magazine in 2008. Additionally, the company established the West Asian, Middle Eastern and North African (WAMENA) Professional Network to support employees from diverse backgrounds.

In August 2008, a New Jersey appellate court ruled against Merrill Lynch in a discrimination case brought by a gay employee, affirming that a single anti-gay comment could constitute grounds for a hostile work environment claim.

Market timing settlement

In 2002, Merrill Lynch agreed to pay a $10 million civil fine related to improper conduct at its Fort Lee, New Jersey branch. Three financial advisors—and a fourth with lesser involvement—executed 12,457 trades on behalf of client Millennium Partners across at least 521 mutual funds and 63 sub-accounts within 40 variable annuities. Millennium Partners realized profits in more than half of these funds, totaling approximately $60 million. Merrill Lynch was found negligent in supervising these advisors whose market timing strategies generated short-term gains at the expense of long-term mutual fund investors.

Bonus distributions in 2008

Although Merrill Lynch recorded losses amounting to $27 billion, it authorized bonus payouts totaling $3.6 billion for the 2008 fiscal year. This sum equated to roughly one-third of the federal TARP bailout funds the company had received. The timing of these bonus disbursements sparked widespread controversy due to the company's precarious financial state.

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