Merrill Lynch

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What is it?

Merrill Lynch is a large US bank active in everything from investment banking to asset management, private wealth management, insurance and global custody. It is known as Bank of America Merrill Lynch

What's it got to do with the financial crisis?

Merrill Lynch is one of several banks to suffer particularly harshly at the hands of the credit crunch. But while rival bank Lehman Brothers failed, Merrill went the way of Bear Stearns and was acquired by a rival - Bank of America. Unlike Bear Stearns, however, Merrill wasn't in dire straits when the acquisition took place, and the buyout was not backed by the Federal Reserve.

It became apparent early on that things were not right. In the 12 months after the credit crunch began in August 2007, Merrill Lynch wrote down $30bn of mortgage backed securities and other illiquid assets; numerous senior people were asked to leave, including chief executive Stan O'Neal; and it began implementing a programme to reduce its headcount by 4,000 people.

The share price also plummeted - in 2004, Merrill Lynch shares traded at $55. By July 2008, they were trading closer to $26.

In July 2008, Merrill became one of the first banks to sell the highly illiquid CDO assets on its balance sheet. It sold CDOs with a 'face value' (ie, what they were supposed to be worth) of $30.6bn to private equity company Lone Star for a mere $6.7bn.

Merrill Lynch's exposure to the credit crunch was partly the legacy of ex-chief executive Stan O'Neal. From 2005, O'Neal encouraged the bank to move into the business areas which were at the heart of the crunch - Merrill was the number one bank for CDO underwriting, for example.

When it came, Merrill's end was swift. Following the demise, almost overnight, of Lehman Brothers on Monday 15 September 2008, as the US bank with the next biggest writedowns, Merrill feared that it would be next to go. Facilitated by the Federal Reserve, and at talks called to discuss the possible rescue of Lehman Brothers, Merrill chief exec John Thain negotiated a surprise/shock deal to sell Merrill to Bank of America for $29 per share, a 70% premium to the $17.05 closing price the previous Friday.

Over the next several months, the acquisition fell into trouble as Merrill racked up over $15 billion of losses in the last three months of 2008. Bank of America chief executive Ken Lewis balked at the deal, which caused Treasury Secretary Hank Paulson to threaten to remove Lewis from his job if Bank of America failed to complete the acquisition. To facilitate the deal, the government offered to guarantee $118 billion of Bank of America's assets and invested another $20 billion into the firm on top of $25 billion it had received through the Troubled Asset Relief Programme in the fall. Still, the threat that forced the deal led to several Congressional hearings about the merger, during which elected representatives took federal officials including Federal Reserve chairman Ben Bernanke to task for bullying Lewis. It didn't help that Bernanke, Lewis and Treasury Secretary Hank Paulson all had a different version of events. It is hard to say who got the last laugh, however, since the government subsequently helped install several executives in a race to succeed Lewis.

Last updated on 7 September 2009.

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