Merrill Lynch
Transcript: -Merrill, Lynch began as an investment bank. It specialized in underwriting the securities of chain stores, which started to gain popularity in the 1920's. -Invested in Safeway Stores in 1926 and it became the #3 grocery store in the country. --> Purchased 80% of the outstanding stock for $3.5 million Improved Credit Ratings lower interest rate After 2001, the real estate boom accelerated. in order to service the market, Wall street created a number of financial instruments which mainly lead to decline of Merrill Lynch Collateralized Debt Obligation(CDOs) Mortgage-Backed Securities The Great Depression Merrill Lynch's Beginning Stanley O'Neal 2nd to last CEO and Chairman of Merrill Lynch (2002-2007) Held most accountable for the company's downfall Abandoned the "Mother Merrill" foundation Wanted to make Merrill more like Goldman Sachs Known for his single-minded approach to running the firm Ousted many of his top executives and isolated himself Said that to generate higher returns, the firm should take on more risks Merrill Lynch What could federal regulators have done to avoid these problems? -In 1941, the firm acquired a New Orleans brokerage firm called Fenner & Beane. -The firm made revolutionary actions when they set out to educate the public. --> Ran ads with titles such as "What Everybody Ought To Know About This Stock And Bond Business" -->sponsored investment seminars for women. -1929: Merrill, Lynch was prepared for the stock market crash; however, they decided to sell the firm's retail operations to E.A. Pierce & Company. -1935: Merrill, Lynch and E.A. Pierce bought Cassatt & Co., an investment banking firm from Philadelphia. -1938: Lynch passes away. -1939:Pierce convinced Merrill to join forces. -1940:This merger created Merrill Lynch, E.A. Pierce & Cassatt. Government were faced the decision of attempting to save the financial system from systemic failure at the cost of creating moral hazard. Bailout by government will encourage risk behavior. cost of borrowing money decreased Other Players What should be done for the future? when the price of housing began to fall, the demise began. One of the factors that contributed to the financial crisis of 2008 is the breakdown of the sub prime mortgage loan market. Merrill Lynch, which known as" Bullish in America" used to be pretty confident in their ability to handle the mortgage markets. Nevertheless, in year 2008, Merrill Lynch lost up to $19.2 billion, struggling to raise capital from sovereign wealth funds and other investors, and sell risky assets. On September 15, 2008, Merrill Lynch agreed to be bought by BofA for $29 per share. 1. Feds transfered 25 billion dollars to BoA to purchase Merrill Lynch 2. Boa and Merrill Lynch used this money to pay the investors and bonus instead of keeping the job. 3. Merrill lynch is too big to be fail. the Demise of Merrill Lynch Improved Risk Management and Regulation The Future of Merrill Lynch John Thain Took over as the last CEO and chairman of Merrill Lynch Ultimately forced to sell the company to Bank of America in September 2008 for about $50 billion or $29 a share Thain then paid his traders and executives $3.6 billion in bonuses before the deal closed without informing the public Merrill's losses were actually worse than expected and BofA required a government bailout of $45 billion in direct government loans Had Merrill Lynch not been saved, the economy would have been impacted immensely Merrill Lynch, now called Merrill Lynch Wealth Management is the wealth management division of BofA and is a provider of corporate and investment banking services with more than 15,000 employees and approximately $2.2 trillion in client assets The Tradeoff between moral hazard and systemic risk Benefit of bailout Major Players Involved Cost of bailout How is Merrill Lynch involved in this crisis? 1. In the beginning of this century, interest rates were relatively low, investors were spurred to seek for high return. 2. Subprime mortgage: lend to the people with low credit rating. 3 Securitization: Package these mortgages into a pool, then investment banks sell these pools to investors. housing boom 1. Borrowers could not refinance their mortgage. 2. Value of asset backed securities held by Merrill Lynch fell. 3. Market lost confidence to Merrill Lynch. 4. Merrill Lynch recorded a loss of 14.7 billion dollars in first quarter of 2008 THE DOWNFALL 1. Saved Merrill lynch, saved thousands of jobs. 2 After the purchase, Boa got wealth management department. 3. Merrill Lynch is too big to fail, build up the market confidence. Why Subprime Mortgage is ideal for securitization? Another Important Merger -Charles E Merrill and Edmund C Lynch were roommates in 1907. -Merrill started Charles E Merrill & Co in 1914, very shortly after is joined by Lynch creating Merrill, Lynch & Co. 1. Merrill lynch was the biggest brokerage firm 2. As a newcomer in the subprime mortgage, Merrill lynch invested billions in MBS (mortgage backed