University of Technology, Jamaica Treasury Management Tutor: Lloyd Wint Wednesday 7pm to 9pm Tutorial

MERRILL LYNCH
Group Members: Jheanelle Brown 1001093 Burchell Richards Chantal OHara Latainia Webb

MERRILL LYNCH TIMELINE OF EVENTS

1907: Charles Merrill arrives in New York to work for a textile company. He meets Edmund Lynch, who is looking for someone to share his boarding-house room at the 23rd Street YMCA. Both men were born in 1885. 1914: Charles E Merrill & Co opens its doors in January. Lynch joins him, and in May they open an office at 7 Wall Street in downtown Manhattan. 1915: The firm changes its name to Merrill, Lynch & Co. An associate notices a difference between the partners: "Merrill could imagine the possibilities; Lynch imagined what might go wrong in a malevolent world." 1938: Edmund Lynch dies. Merrill Lynch drops the comma from its name. 1956: Merrill helps take Ford Motor Co public, giving the firm its first billion-dollar year in underwriting. The same year, Charles Merrill dies. 1958: Firm changes its name to Merrill Lynch, Pierce, Fenner & Smith. 1960: Merrill opens its first London office. Four years later, it opens its first Tokyo office. 1964: Merrill buys C.J. Devine, becoming a dealer in fixed-income securities. 1971: Merrill goes public and lists on the New York Stock Exchange. 1976: Merrill creates Merrill Lynch Asset Management. 1999: Merrill is world's largest underwriter of stocks and bonds for the last time, a title it cedes the next year to Citigroup Inc. 2001: Most of Merrill's 9,000 Wall Street employees evacuate their offices opposite the World Trade Center during the 9/11 attacks. Three die.

Dec 2002: Merrill reaches $100 million settlement with New York Attorney General Eliot Spitzer over alleged conflicts of interest by research analysts. The same month, it names Stanley O'Neal chief executive. He becomes chairman in April 2003. 2006: Merrill adds billions of dollars of mortgages to its balance sheet. It acquires First Franklin Financial Corp, a subprime mortgage lender owned by National City Corp. Oct 2007: Merrill ousts Stanley O'Neal as chairman and chief executive as mortgage losses begin to mount, and after O'Neal approaches Wachovia Corp about a merger without telling the board. John Thain, chief executive of NYSE Euronext, is named his replacement as of Dec 1. 2008: Losses top $19.2 billion in the year ended June 30, as credit losses $40 billion. Merrill scrambles to raise capital from sovereign wealth funds and other investors, and sell risky assets. Sept 15, 2008: Merrill agrees to be acquired by Bank of America for $29 per share.

WHY MERRILL LYNCH FAILED After 2001, the real estate boom accelerated. To service this market, Wall Street created a number of financial instruments. These instruments were a major cause for the decline of Merrill Lynch. Collateralized Debt Obligations (CDO): These instruments repackaged a pool of bonds, derivatives, and other instruments such as corporate bonds. The CDO derived its value from converting illiquid assets, such as buildings, into liquid financial instruments. A mortgage CDO bundled thousands of individual mortgages into a single bond, which was supposed to diversify default risk.

Mortgage-backed Securities: These are a subset of CDOs. They were bundles of mortgages that were sold to Fannie Mae, which repackaged them to sell as stock to individual investors. This process enabled banks to take mortgages off their balance sheets.

Credit Default Swaps (CDS): These were an insurance policy against the risk of investors, who bought them like bonds. A premium was paid to underwrite the risk of the various instruments like CDOs. CDSs lowered the cost of taking risks and created confidence in investors.

Risky Financial Instruments In 2001, interest rates in the U.S. fell to low levels for several reasons. The environment of cheap credit encouraged investors and financial institutions to speculate in the real estate market, which increased property value and enticed household consumers to take additional debt. The Federal Reserve began to raise the interest rate incrementally in late 2004. By 2006, the subprime mortgage market began to appear vulnerable because of the increased interest rate. Holders of adjustable rate mortgages were required to make higher monthly payments than many could meet. The entire mortgage finance system, which was based on the assumption of ever-rising property value, began to unravel. Many rushed to sell their houses, which created further downward pressure on housing prices. This created a series of financial failures as CDOs dropped in value and banks lost their capital in defaults and withdrawals. In June 2007, two hedge funds managed by Bear Sterns suffered substantial losses and required huge capital injections from the bank, frightened investors, and investments bankers. These funds were heavily invested in high-risk, mortgage-backed securities and had been used to borrow more capital from the market.

BoA and Merrill Buy Damaging Assets

Countrywide Financials, which was Americas largest mortgage lender, had huge exposure in the subprime market. The company had approximately 900 offices and $200 billion in assets but was forced to draw down on its entire $11.5 billion credit line because of high exposure in the subprime market. Many regulators blamed Countrywide for helping fuel the housing bubble by offering loans to high-risk borrowers, so the company had very little hope of government help. Ken Lewis saw this as an opportunity to enhance the banks role in mortgage banking. Bank of America took a 16 percent stake in the company in August 2007, and there were hopes that this investment would bring some confidence in the market. But Countrywides stock collapsed, and Bank of America bought Countrywide with a total investment of $4.1billion.

Former Merrill Lynch CEO Stan ONeal said that to generate higher returns, the firm would take on more risks. After entering the mortgage market by repackaging and selling home loans on the debt markets, Merrill Lynch acquired mortgage origination companies so collateral could be readily available. With AIG as its partner, Merrill Lynch became the largest issuer of CDOs. By the end of 2008, Merrill Lynch had issued CDOs worth $136 billion. In 2005, AIG had stopped insuring even the highest-rated CDOs issued by Merrill Lynch because of its aggressive underwriting policies, but Merrill Lynch continued to do what made the highest profits. When the subprime market slowed down, the entire CDO market unraveled. Merrill Lynch, like many others, did not record its position in the market, as the market and credit rating agencies had failed to anticipate the possibility of large-scale collapse in the housing market. http://sevenpillarsinstitute.org/case-studies/bank-of-americas-takeover-of-merrill-lynch

References Stempel, J. (2008, September 15) TIMELINE: History of Merrill Lynch. Retrieved from: http://www.reuters.com/article/2008/09/15/us-merrill-idUSN1546989520080915