Greg Farrell - Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America

Copyright 2010 by Greg Farrell
Preface copyright 2011 by Greg Farrell

All rights reserved.
Published in the United States by Crown Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., New York.
www.crownpublishing.com

C ROWN B USINESS is a trademark and C ROWN and the Rising Sun colophon are registered trademarks of Random House, Inc.

Originally published as a hardcover in the United States by Crown Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., New York, in 2010.

Library of Congress Cataloging-in-Publication Data is available upon request.

eISBN: 978-0-307-71788-7

Cover design by Pete Gargeau
Cover photograph by Studio Blond/Getty Images

v3.1

In memory of my father,
D AVID J. F ARRELL ,
a righteous man

ALMOST THREE YEARS HAVE gone by since the darkest days of the financial crisis, in September 2008, when Bank of America offered to buy Merrill Lynch. During that time, legions of international expertseconomists, central bankers, academics, and elected officialshave attempted to explain the origins of the crisis and devise regulations that would prevent such cataclysmic events from occurring again. While there is much to be said in favor of new rules regarding bank capital requirements and the Dodd Frank law that is being implemented in the United States, certain aspects of human nature are not subject to acts of Congress. One lesson from the crisis that should be seared into the public consciousness is that the brightest, most rational men in finance are capable of making supremely idiotic decisions, provided the stakes are great enough.

APRIL 2011

STAN ONEAL, CHIEF EXECUTIVE officer of Merrill Lynch, a Wall Street firm on the verge of disaster, had only himself to blame. He calculated the damage that had been wrought. He reviewed the mistakes he had committed, the strategic blunders, the errors in judgment, and disregard for risk, all of which was exacerbated by faulty execution. Of course it wasnt entirely his fault, since he relied on the advice of the one person who should have known betterhis caddy.

The final tally for ONeals round of golf was 88, one stroke better than the day before, but well off the 80 he had shot just a week earlier at Waccabuc, near his home in a remote corner of Westchester County, north of New York City. It was near twilight on a Sunday in late September 2007, and as mediocre as his round of golf at the Country Club of Purchase had been, at least it was a better experience than the meeting hed had in the city that day, where he had flirted with the unthinkable.

JUST A FEW HOURS earlier, ONeal found himself squirming in the backseat of his Audi A8 as his driver navigated the Sunday afternoon traffic of Manhattan, crawling inexorably, block by block, red light by red light, toward his destination, the Time Warner Center on the southwest corner of Central Park.

As always, when the Merrill Lynch chief executive was hatching a plan of any magnitudefrom the firing of top executives to the outright sale of Merrill Lynch, which was the reason for his meeting this dayhe relied on the counsel and advice of the only person he absolutely, unconditionally trusted: himself.

Throughout his career, that trust had been well-placed. The story of ONeals rise to the pinnacle of Wall Street was by now legendary. The fifty-seven-year-old African-American, born in Roanoke, Alabama, and raised in the dirt-poor town of Wedowee, Alabama, the grandson of a man born into slavery in the 1860s, had shattered every glass ceiling and stormed through, over, or around every obstacle placed in his way to become chief executive of Merrill Lynch at the end of 2002.

Over the next five years, he transformed the business. The backbone of Merrill Lynch had always been its nationwide network of financial advisorsthe 16,000 men and women spread across the U.S. who managed not only the investments of the wealthiest people in Philadelphia, Chicago, San Francisco, Los Angeles, and other large cities, but the slender portfolios of the hardworking citizens in second-tier towns like Cincinnati, Wichita, Lansing, Spokane.

Most Wall Street banks and brokerage firms catered to huge institutional investorspension funds with billions of dollars in assetsand plutocrats sitting atop massive fortunes. It was the genius of Charlie Merrill, the founder of Merrill Lynch, to look beyond the super-wealthy and build an investment advisory business at the grassroots level, by courting the modest sums of the thrifty, as he wrote early in his career.

Starting in the 1940s, when most Americans still had searing memories of the stock market crash of 1929 and the Great Depression that followed, Merrill pursued his vision. Over the course of several decades Merrill Lynch became a powerhouse through its incomparable network of brokers across the U.S., connecting Wall Street to Main Street. In the second half of the twentieth century, most large companies that sold stock to the public wanted to use Merrill Lynch as their sales force to reach investors not just in the big cities, but in the midsized burgs of flyover country. A TV commercial in the 1970s, showing a stampede of longhorns, declared that Merrill Lynch was bullish on America, and from that point forward, the symbol of the bull became synonymous with Merrill Lynch. The firms retail brokers became known as Merrills thundering herd.

Across the United States, in every town where they set up shop, members of Merrills thundering herd were among the most prominent citizens, stalwarts of the local Rotary clubs, people who could be counted on to raise money for charitable causes. They were the pillars of their communities.

By 2000, the world of capital markets had changed. In order to keep growing, Merrill Lynch had built up its own investment bank so it could originate the stock offerings that were then distributed and sold through its network. It had also constructed a world-class sales and trading operation allowing the firm not only to buy and sell stocks directly for its clients but also to traffic in the lucrative world of fixed-income derivative products, a market in which Merrill Lynch could bet large sums of money to generate easy revenues.

In 2001, Stan ONeal beat out his competitors for the top job at Merrill Lynch in part because he convinced the board of directors he could whip the firms disparate businessesweighed down by a low-growth network of financial advisorsinto a more profitable, full-service investment bank.

From 2002 through 2006 he delivered on that promise, de-emphasizing the companys roots as a retail brokerage network and building up Merrills sales and trading operations, which generated billions of dollars in profits each year. Through the first two quarters of 2007, Merrill Lynch continued its streak of record breaking profits, establishing itself as a Wall Street colossus that rivaled Goldman Sachs, the ultimate Wall Street money machine.

The date was Sunday, September 30, 2007. ONeal was about to meet with Ken Lewis, chief executive of Bank of America, who was prepared, as a precondition of the meeting, to offer $90 a share to buy Merrill Lynch outright. The stock price had closed at $71.28 the previous Friday. Merrill Lynch had more than 853 million shares outstanding, so at $90 per share, Lewis was prepared to pay almost $77 billion for the company. Based on its own share price, Bank of America had a market capitalization of $223 billion, about three times the size of what Lewis was willing to put on the table for Merrill.