Merrill Lynch

Company Snapshot:

Merrill Lynch is one of the world's largest stock brokerage houses, with offices in 38 countries and territories and total client assets of approximately $1.8 trillion. The company's 2006 revenues were $ 34.6 billion. The company's logo is the famous bull. The company offers diverse financial services. Of the major investment banks, Merrill is the most active in serving as a brokerage for individual investors.

Basic information

Ownership status:

Publicly traded

Number of employees worldwide:

64,200

Chief executive officer:

John Thain (recently appointed)

Website:

http://www.ml.com

Tel:

212-449-1000

Corporate accountability

Brief company history:

Charles Merrill founded a brokerage house that would eventually become Merrill Lynch at the beginning of World War I, quickly using his customer base of mostly small investors to underwrite several retailers, including McCrory Stores, Kresge, and the Acme Tea Co. After the war he and his partner Edmund "Eddie" Lynch took an equity stake in the French motion production company Pathe Freres Cinema, one of the silent era's best known movie producers. Within several years they controlled Pathe and had become movie tycoons. They eventually sold their interest to a group headed by Joseph P. Kennedy and Cecil B. DeMille.

Merrill and Lynch added more retailing clients during the 1920s, including Newberry, Walgreen Drugs, Wesern Auto, and Safeway. Merrill also acquired an interest in Safeway. Charles Merrill slowly withdrew from the brokerage and investment banking business to eventually gain a controlling interest in Safeway, which he expanded in the 1930s. Merrill returned to the brokerage business later.

Starting in the 1950s, Merrill encouraged investment in stocks (after the events of the 1930s had given brokers a bad reputation and convinced much of the public that financial markets were little more than a sophisticated casino) by carefully training its brokers, providing them with solid research on investment prospects and emphasizing the importance of recommending investments appropriate to the client's individual needs. It also put brokers on salary, abolishing the traditional practice of compensating them strictly on the basis of the commissions they generated. Merrill also advertised aggressively, running newspaper and magazine ads designed to convince people that equities represented a safe and lucrative long-term investment. Other firms, as well as the exchanges, followed suit.

In the 1970s, the man ho engineered Merrill Lynch's move into other fields was Donald T. Regan, who went on to become Ronald Reagan's Treasury Secretary.

Corporate accountability:

Merrill Lynch is a big supporter of the Heritage Institute, the right-wing think tank that, among other things, has been one of the big proponents of the privatization of Social Security -- a policy that Austin Goolsbee, a U. of Chicago economist, estimated would result in some $400 billion to $1 trillion in broker fees and skim-off-the-top schemes for Wall Street banks.

Merrill Lynch was one of the creditor banks that orchestrated the bail-out of Long Term Capital Management (LTCM).

Two of the company's major clients — Enron and ImClone — were embroiled in the corporate finance scandals of 2002.

Role in Enron: (For more details see the Report of the Senate Permanent Subcommittee on Investigations: "Fishtail, Bacchus, and Slapshot: Four Enron Transactions Funded and Facilitated by U.S. Financial Institutions," January 2, 2003 http://www.enron.com/corp/por/pdfs/010203psireport.pdf ; GAO-03-511, "Investment Banks: The Role of Firms and Their Analysts With Enron and Global Crossing," March 17, 2003; Business Week, "Merrill Lynch: See No Evil," September 16, 2002, http://www.businessweek.com/magazine/content/02_37/b3799097.htm)

Merrill Lynch was entangled in the Enron scandal in a number of ways, as a result of the many roles in played: underwriter of stocks and bonds, lender, fundraiser, investor, and counterparty in energy derivatives deals. Internal documents showed that Merrill even helped Enron out of a tight spot by acquiring assets so that Enron could inflate its annual earnings.

Merrill Lynch (along with JP Morgan Chase and Citigroup) also helped Enron's CFO Andrew Fastow establish various off-balance sheet "special purpose entities" for the purpose of hiding the company's debt. At the very least they didn't adequately explain them to investors. According to Enron whistleblower Merrill Lynch was initially reluctant to go along with Fastow, who threatened the bank -- "if you don't invest in LJM (one of the SPEs Fastow set up to hide the company's debt), Enron will not use you as a banker or an investment banker again." The bank buckled under Fastow's demands. As a result, the bank was later charged with conspiracy to commit wire fraud, falsifying books and records, and perjury.

According to the SEC, Merrill Lynch violated its fiduciary responsibility to investors who entrusted it as an asset management company to use their money prudently, in a manner consistent with their financial goals. Instead, the company helped Enron create a false "sale" of three barges. Designed to look like a sale, in reality the transaction was an "asset parking" arrangement -- i.e. just a loan designed to help Enron meet its profit target in the last quarter of 1999. (Merrill bought an interest in a number of Nigerian barges from Enron with the understanding that it would be paid back with interest within six months.) In late 1999, Merrill Lynch also extracted an $8.5 million structuring fee for another deceptive deal designed to inflate Enron's income by about $50 million, through two complex energy options trades.

The Senate Permanent Subcommittee on Investigations obtained internal Merrill documents in which a senior company executive worried that the firm might "aid/abet" the manipulation of Enron's income statement. (Richard A. Oppel Jr., "Senator Says Merrill Lynch Helped Enron Cook Books," NYTimes July 31, 2002).

Assistant U.S. Attorney Kathryn Ruemmler said Merrill ``aided and abetted these Enron executives for one simple reason: There was money in it, a lot of money. The defendants ``didn't think the rules applied to them, and they didn't think they'd get caught.

Though the specific deal was only a small part of Enron’s multi-billion dollar accounting fraud, the practice of disguising loans as sales was reportedly common in Enron’s empire of fraud. The case was also the first criminal conviction stemming from the Enron case. Assistant U.S. Attorney General Christopher Wray called the trial “a milestone in bringing both an Enron executive and Merrill Lynch executives who aided and abetted the fraud at Enron to justice.'' For its role in the Enron scandal, Merrill Lynch paid the SEC a $80 million fine on March 17, 2003. Merrill neither admitted nor denied any wrongdoing.

Those convicted of one count of conspiracy and two counts of wire fraud were former Merrill investment banking chief Daniel Bayly, 57; former Enron finance executive Dan Boyle, 48; former Merrill strategic financial group chief James Brown, 52; former Merrill managing director Robert Furst, 43; and former Merrill vice president William Fuhs, 36 Former Enron accounting executive Sheila Kahanek, 38, was acquitted of all charges. (Kurt Eichenwald, "Jury Convicts 5 Involved in Enron Deal With Merrill,” New York Times, 11/4/2004) http://www.nytimes.com/2004/11/04/business/04enron.html?_r=1&oref=slogin

Senate investigators said that John Olson, a Merrill analyst, was ousted from the firm in 1998 because Merrill was upset that his skeptical coverage of Enron was costing the firm millions of dollars in investment-banking revenue. After Olson's departure, the analyst who replaced him soon awarded Enron a higher rating and Schuyler Tilney, a managing director at Merrill Lynch sent an email to Merrill's president, stating that Enron's "animosity" over Merrill's research had "dissipated," and "to that end" the company had awarded the firm business that he expected would bring in at least $45 million in fees. Merrill officials said Olson left because of a move to consolidate the research department, and had nothing to do with his Enron coverage.

Schuyler Tilney, the Merrill managing director, "had a special relationship with Enron," according to the New York Times. When called to testify before Senate committee examining Enron's deals with the Bank in July 2002, Tilney invoked his Fifth Amendment right and refused to testify. Tilney was part of a group of Merrill executives who invested about $16 million in LJM2, one of the offshore partnerships set up by Fastow. These investments created a conflict of interest in Merrill's ability to advise other investors with respect to Enron, say critics. Merrill earned about $40 million in investment banking fees from Enron between 1997 and 2001.

Tilney was a close personal friend and even vacationed with Enron CFO Andrew Fastow. His wife, Elizabeth A. Tilney was a senior Enron executive and personal friend of Ken Lay, who after receiving a letter from Enron whistleblower Sherron S. Watkins complaining about CFO Andrew Fastow's partnerships and the possibility that Enron would "implode in a wave of accounting scandals," directed Wakins to devise a crisis management strategy with Ms. Tilney (despite the fact that her husband had invested in one of those partnerships -- LJM2). Ms. Tilney was also the marketing executive who in 1997 introduced the company's new logo, the "crooked E." (David Barboza, "Merrill Banker Had Many Direct Ties to Enron," July 31, 2002).

Role in the Orange County, CA Debacle:

In 1994 Orange County declared bankruptcy after posting $1.6 billion in losses, largely due to a bad mix of interest-rate derivatives, acquired following the suggestion of Merrill Lynch bankers. Merrill settled for its role in the case for $ 470 million. ("Orange County, Merrill Lynch Announce Settlement Lawsuit," Orange County Executive Office press release, June 2, 1998).

Ties to Dennis Kozlowski, ex-CEO of Tyco: Phua K. Young former Merrill Lynch stock analyst who was a tireless cheerleader for Tyco International Ltd. reportedly exchanged gits with Dennis Kozlowski, the former CEO of Tyco who spent the company's money lavishly and was later convicted. Young sent wine to Kozlowski to thank him for having helped persuade Merrill to hire him for a job where he was able to issue consistently positive ratings of Tyco. (Patrick McGeehan, "Lawyer Says Ex-Merrill Analyst Traded Gifts With Tyco Chief," NYTimes, September 14, 2002)

Anti-competetive, consumer protection and tax practices:

In 2001 the wall of protection that traditionally sheltered securities analysts from litigation and SEC enforcement cracked when a Merrill Lynch investor filed an arbitration claim against Henry Blodget and Merrill lynch, alleging that Blodget's strong recommendation of a high tech Internet company had been the result of conflicts of interest and Blodget's desire to increase his own compensation by supporting ML's investment banking division. Although it denied the charge, the company settled the case for $400,000, suggesting to many that it did not want to attract further publicity to the issue. (WSJ, 3/2/2001, C-18).

Then New York Attorney General Eliot Spitzer opened an investigation in the summer of 2001. Spitzer's staff found clearcut evidence that ML's enthusiastic public support of a number of Internet stocks was often contradicted by email correspondence circulating among ML staffers at the same time, which showed that the analysts' actual opinions of the same stocks were highly negative. Blodget, for instance, had described stocks that were highly rated by Merrill at the time as "a disaster," "a piece of crap" and "a piece of junk." Spitzer ended up charging the company in April of 2002, alleging that "Merrill Lynch's ratings were tarnished by an undisclosed conflict of interest: the research analysts were acting as quasi-investment bankers for companies at issue, often initiating, continuing, and/or manipulating research coverage for the purpose of attracting and keeping investment banking clients, thereby producing misleading rating that were neither objective nor independent, as they purported to be." Merrill Lynch quickly entered into a $100 million settlement with Spitzer on May 21, 2002. One of the most innovative features of the settlement -- later adopted by Spitzer and the SEC in a "global" settlement with 10 other banks involved in similar conflicts, required the company to provide research advice to its customers that came from independent analysts hired by an independent consultant. (John Coffee, Gatekeepers, p 264)

But USA Today was hardly impressed with Spitzer's settlement, calling it "a big step back from [Spitzer's] earlier bluster." The $100 million fine was "a modest amount to a $40 billion business like Merrill Lynch. ... [T]his wrist-slap and the other provisions of the settlement aren't likely to stop companies from peddling self-serving hype as honest market analysis." ("Merrill Lynch deal won't restore investors' trust," USA Today (editorial), May 23, 2002)

A 1999 memo revealed that Blodget spent 85 percent of his time on investment bankers and 15 percent on research (creating and publishing company analysis) -- i.e. the vast majority of his time was spent trying to land IPO or stock bond issuance deals, instead of actually analyzing the same companies for investors. One email sent to Blodget by one of his junior Internet research analysts sated, "The whole idea that research is independent from banking is a big lie." Spitzer later used that e-mail during his investigation. In the end, however, focusing on the analysts spared investigators from questioning the larger structural issues -- i.e. that the Chinese wall separating analysts dealing with publc investors (their stated job) and their connection with investment banking (i.e. private transactions) was a fiction.

In October 2007, Merrill CEO Stanley O'Neal was ousted after announcing an $8.4 billion write-down, largely a result of its involvement in subprime mortgages. In late October the SEC began an investigation related to its holdings of high-risk mortgage debt. A few weeks later, Merrill disclosed in a filing that a class-action lawsuit by shareholders and a shareholder-derivative suit had recently been filed against the company and several executives for allegedly failing to disclose pertinent information concerning its collateralized debt obligations, or CDOs, complex instruments that combine different kinds of risk.

O’Neal, the embattled Merrill Lynch CEO, claimed he “created” wealth in 2006 when critics blasted his $46.4 million take-home pay. Merrill made $7 billion wheeling and dealing in 2006, over triple the $2.2 billion the company raked up in 2002, the year O’Neal became Merrill’s CEO. But in 2007, unfortunately for O’Neal, Merrill Lynch lost $2.3 billion in just the third quarter alone. O’Neal, as Merrill Lynch CEO, started out by axing employees right and left, in the process shredding the little that remained of his company’s no-layoff “Mother Merrill” institutional culture. Then he pushed Merrill into speculation, boosting “Merrill’s exposure to the volatile and ultimately toxic market for complex debt instruments” from $1 billion to $40 billion, in just 18 months, right as the sub-prime mortgage market was beginning to melt. As a result, Merrill would see the biggest losses in the company’s 93-year history. Finally, he tried to finagle a last-minute merger between Merrill and the Wachovia bank. For O’Neal, this merger made eminent sense. Under his CEO contract, any merger that led to his exit from Merrill’s top executive suite would entitle O'Neal to “a potential $274 million payout.” But it was too late. The merger blew up in his face. Poor O’Neal would have to "settle" for an exit package most analysts peg at $161.5 million, but could, says Reuters, “easily top $200 million.” On top of the $160 million he received during his five years as CEO.

Shad Rowe, the president of the watchdog group Investors for Director Accountability, sees all this as nothing short of disgusting. O’Neal, he charges, “was paid a tremendous amount of money to create a loss that is mind-boggling, and he obviously took risks that should never have been taken.”

Political influence:

Merrill Lynch is one of the top financial contributors in the financial services sector. According to the Center for Responsive Politics (which uses FEC data), Merrill Lynch gave a total of $12,634,199 to federal candidates between 1990 and 2006, including $ 4,341,167 (34%) to Democrats and $ 8,251,718 (65%) to Republicans.

Over the years, the company has been a dominant voice in efforts to deregulate the financial services industry.

According to the Center for Public Integrity, Merrill Lynch, its executives and associated PACs is the second largest career supporter of George W. Bush, contributing a total amount of $654,704 over his career. Former Merrill CEO Stanley O'Neal was one of Bush's top fundraisers. He was a "Ranger," raising at least $200,000 for Bush's reelection campaign. In June of 2003, O'Neal sent letters to senior executives at Merrill asking for contributions to the Bush campaign. (See "The Buying of the President 2004", http://www.publicintegrity.org/bop2004/candidate.aspx?cid=1&act=cp) In the 2004 election cycle about 80 percent of Merrill Lynch employee and PAC contributions went to Republican candidates.

Merrill Lynch is a big supporter of the Securities Industry Association (SIA), a key proponent of privatizing social security. Executive Vice President James Gorman of M-L is a board member of the SIA. The SIA is a member of the Alliance for Worker Retirement Security (http://www.retiresecure.org/), a coalition of 30 industry groups and corporations created by the National Association of Manufacturers to lobby "for the creation of personal retirement accounts within Social Security reform." SIAis also a major donor to the Cato Institute's social security reform project, one of the biggest advocates of social security privatization.

Merrill Lynch is also a member of the Business Roundtable and the Financial Services Roundtable, which in turn sponsor the Business Industrial Political Action Committee (BIPAC), another proponent of social security privatization. BIPAC also supports corporate tax cuts and reductions in the capital gains tax rate.

Terry Glen, Chair and President of Merrill Lynch Funds for the Americas, served as Chair of the Investment Company Institute from 2000 to 2002. Merrill Lynch Funds is a member of the ICI, the mutual fund industry association that opposed mutual fund proxy voting disclosure -- a reform mandated by the SEC.

Location(s)

4 World Financial Center

New York, NY, 10080

United States

List of countries in which it operates:

Argentina

Australia

Bahrain

Brazil

Canada

Switzerland (Confoederatio Helvetica)

Chile

China

Germany (Deutschland)

Spain (Espana)

France

Indonesia

Ireland

Israel

India

Italy

Japan

South Korea

Luxembourg

Monaco

Mexico

Netherlands

Panama

Portugal

Russia

Thailand

Turkey

Taiwan

United Kingdom

United States

Uruguay

South Africa

Other information:

Merrill Lynch is one of the top traders in foreign exchange instruments (over-the-counter transactions that take place directly between two parties, without an exchange).

Merrill Lynch is one of the largest issuers of international bonds.

Like most Wall St. firms, the company sponsors an annual financial services conference, usually in September.

Although most financial services companies tend to articulate their vision in terms of specific business sectors, in 1996 Merrill articulated its global vision differently: "[O]nce segmented markets are joining into regional blocs, which in turn are coalescing into a single vast global market....Indeed, as this global marketplace grows, fed by the revolution in information technology and the erosion of international trade barriers, it will actively foster winners. ... For Merrill Lynch the globalization of capital markets has the paradoxical effect of leading usto pursue a strategy of becoming more local at the same time we are becoming more global. ... To help both investors and issuing clients reap the full benefits of globalization, we must be global in the products, services and intelligence we bring to bear, but we must also be local in our relationships and our ability to participate in key local market activities, which are growing rapidly. (1996 Annual Report).