We’ve all heard and read about several business owners making it big and scoring themselves a spot in the Forbes top 100 list of wealthiest people. But how many times have we heard great success stories and business empires coming crashing down like a house of cards? Well, if you haven’t then, I have a scoop for you, the greed of Merrill Lynch. Greed is said to be one of the seven deadly sins and in the Merrill Lynch scenario it surely proved it! Read on to determine the other sins committed by Merrill Lynch.
How Merrill Lynch Started?
Merrill Lynch formerly known as Merrill, Lynch & Co. was founded in 1914 by Charles E Merrill and his partner Edmund C Lynch. The company started as a retail brokerage business but then shifted to investment banking. In 1930, Merrill Lynch & Co acquired Fenner & Beane the second largest securities firm in the US. And after that the next big venture for Merrill Lynch was the acquisition of C.J. Devine & Co, the leading dealer in US Government Securities. This brought Merrill Lynch the much needed leverage it wanted to establish unique money market products and government bond mutual fund products responsible for the firms growth in the 70’s and 80’s.
Major Breakthrough for Merrill Lynch
In 1971, Merrill Lynch experienced a major breakthrough when it went public and became a multinational corporation with over US $1.8 trillion in client assets and operating in more than 40 countries across the globe. This made Merrill Lynch one of the biggest success stories at that time.
“Did you know that Merrill Lynch introduced Cash Management Account (CMA) in 1977?” Through the introduction of CMA, it enabled customers to sweep all their cash into a money market mutual fund and also included check writing capabilities and credit cards. In fact Fortune magazine called the introduction of CMA by Merrill Lynch as “the most important financial innovation in years”.
In 1990, Merrill Lynch was considered to be one of the few investment firms along with Morgan Stanley and Goldman Sachs that made up the gold standard of investment firms.
Merrill Lynch- the Financial Giant’s Monumental Fall
The two reasons that contributed to the financial giant’s monumental fall were subprime mortgage crisis and CDO controversies. Let’s take a look at how it all happened:
Merrill Lynch like we all know is famously known for its acquisitions and mergers. But this strategy that has always worked in the favor of Merrill Lynch was destined to bring it down when it announced its agreement to acquire the First Franklin, one of the giants of the subprime industry and the leading originator of non prime residential mortgage loans. First Franklin originated more than $29 billion in loans in the year 2005 and had a total servicing portfolio of around $70 billion.
How Subprime Acquisition Back Fire……
In 2006, the subprime market was booming so this surely sounded as the perfect acquisition. The president of Merrill Lynch said that the First Franklin servicing franchise would add scale and create meaningful synergies with their trading and securitization operations. And it would also accelerate vertical integration in mortgages that was bound to enhance growth and returns. Merrill Lynch’s idea was to invest in subprime companies since this industry was growing explosively.
Then how did this flawless idea back fire and resulted into an unmitigated disaster?
What was considered to be a million dollar idea for them became their worst nightmare when Merrill Lynch acquired four more subprime companies. Little did they know that the industry would come in crisis in the next six months of acquisition.
Due to the financial crisis and economic recession that began in 2008, the industry which was predicted to be booming collapsed characterized by subprime mortgage delinquencies and foreclosures. So the company that paid $1.3 billion to acquire subprime mortgage company was now all of a sudden stuck with billion worth of loans that people were not paying back.
These multi-billion acquisitions became a burden for Merrill Lynch which threatened the solvency of the entire company.
At the same time when Merrill Lynch acquired First Franklin, the company was also involved in the mortgage based collateralized debt obligation. Between 2006 and 2007 Merrill Lynch was recognized as the lead underwriter on 136 collateralized debt obligations worth $93 billion. And by the mid of 2008 when the value of CDOs came collapsing down, Merrill Lynch suffered from losses of billions of dollars.
Sale of Merrill Lynch to Bank of America
This huge loss for Merrill Lynch was hard to recover. The significant loss of this company was attributed to the surge in the value of its large and unhedged mortgage portfolio. The trading partners lost all faith and confidence that the Merrill Lynch could recover back to its same state as it was before 2007. This led to the sale of the company who was once known to acquire companies was now looking for a bank to acquire it.
Bank of America announced its willingness to purchase Merrill Lynch in September 2008 for $38.25 billion in stock. It is then reported by the Wall Street Journal that Merrill Lynch was bought by Bank of America for US $50 billion.
The Greed Took Merrill Lynch Down….
In my opinion, the acquisition investment makers at Merrill Lynch demonstrated a myopic approach. They bought 4 sub-prime companies only by keeping the current industry trend in focus. However, a wise investment strategy is never to bet on everything you have in one industry and they went opposite to it which ultimately led to Merrill Lynch catastrophic down fall. Had the investment makers at Merrill Lynch studied the industry trends carefully and considered the economic situation of the country before taking such a big decision, they would have dodged the big blow…. But they didn’t!