There were several factors that led to Merrill’s demise and although culture wasnt the main one, it played an instumental part in the fall of Merrill.
The culture at Merrill was deeply rooted to it brokerage firm origins – which translated into: salesmen, selling less sophisticated, cash products. Despite Merrill’s focus to build out the more complex derivative businesses, it didn’t have the intellectual capacity to understand what was needed to support those businesses and to manage the risk in all market environments. On the trading floor, there was a clear division between the old cash guys and newer, smarter derivative guys. So, although Merrill was using the black box, very few understood how the black box actually worked.
I joined Merrill Lynch in November of 2005, after spending my entire career to date at JP Morgan. Merrill had been aggressively pursuing me for some time and was able to woo me, with its impressive growth story. After my interviews with Merrill’s management team, I was hooked.
I admit, the phenomenal momentum that Merrill had been boasting, was intoxicating. Merrill was undergoing a huge transformation from a brokerage house to an investment bank and its stock was soaring. Stan O’Neal, Merrill’s CEO at time was determined to put Merrill on the map as an investment bank and most importantly, to beat Goldman Sachs.
Winning against Goldman became a cultural obsession at Merrill Lynch, and it sifted into the entire investment bank, straight from the top. Every attempt was made to replicate Goldman’s model for success, which was attributed to their enormous risk appetite – a 30-to-1 leverage. So Merrill piled on the risk with anticipation of subsequent rewards. This model became quite profitable for Merrill – at least while the market worked in their favor.
But what Merrill wasn’t able to replicate was Goldman’s ability to manage risk. Goldman was a firm with tremendous rigor, discipline and well run systems. Furthermore, the people who worked at Goldman Sachs were smartest guys on the street. In contrast to Goldman, Merrill’s culture was one which lacked discipline. Its systems around risk management were not only inferior, but they were inadequate. And finally Merrill’s people, as discussed earlier, were not rocket scientists – AND UNFORTUNATELY, they were building rockets – and other weapons of financial mass destruction.