Slaying of the Bull

By tamara on
image of bull getting slayed

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.



  1. Having worked at Merrill and Goldman, i would agree with that assessment. Lehman, Bear Stearns, and GS, were posted ROEs over 25%, pre financial crisis (at that time, JPM was still a bank that couldn’t get all parts of the bank to work). So, you have consultant firms telling Merrill, Citi, UBS, RBS, etc, that you need to use your capital more efficiently. You need to do more prop. trading (leverage ratio of 50 to 1), and expand into sophisticated products such as CDOs. Merrill was a flow shop..don’t really have the DNA in CODs or CDOs, similarly to UBS.

    The lesson is that you have to know your DNA and resist the urget to follow the herd. Anyways, wall street doesn’t run like a owner and operator model. It is gambling with house money with limited downside. The worst is that you get fired, but you already have your millions in the bank. There won’t any clawbacks back then.

    • Hi, Mike. What right wing political reocrd are you referring to? Make sure you are researching the right Pat Huddleston.I agree that regulation goes against Republican policies. De-regulation has been a major plank in their platform for thirty years. And here we are. I understand the tendency of the victims to blame themselves. I’ve spoken face-to-face with hundreds of victims and most of them blame themselves. But, while it is true that most could have avoided the scam with more and better due diligence up front, I do not think that should excuse the scam operator. A Madoff victim who does not blame Madoff is rare indeed. Caveat emptor was the law of the land before the crash of 1929. Going back to it rather than forward to better regulation of the securities industry would not be wise. If caveat emptor is the rule, the only smart choice is not to put your money in the market, because no ordinary investor has the time to bring himself or herself up to speed on everything securities industry insiders know. Of course, if people stop investing in the capital markets, an important source of business financing dries up. That would severely hurt an already lousy unemployment situation and drive the stock market through the floor.I do not know you, Mike. But I think you have something important to say on a very timely topic, and I would like (and would like our readers) to hear it. If my opinions are offensive to you, please speak to why they are offensive and make an argument for why another way is better. I appreciate your post and I look forward to understanding your perspective better. Peace,Pat

  2. Thanks so much for your comment. You certainly have a lot of insight on this topic. I also appreciate your humor – I alos remember the town hall when the caller spoke about CODs instead of CDOs very clever!

    • Hi, Mike:1. No. I was never on the Bush staff. It’s an honest mitkase. Mine is not a common name. But it is more common than I ever thought. There are about half of dozen of us who show up in Google searches. I joined the SEC at the end of the Bush 41 administration and left toward the end of Clinton’s second term. My position was not a political appointment. I know that there have been national politicians from Kentucky with my last name, but I’m not from that branch. When I left the SEC I decided to continue protecting investors rather than represent the industry. My friends will think it funny that there is a Bush staffer with my name. While I respect the office of the Presidency, I do not think Bush 43 did enough to protect our markets or the investing public. But, then again, neither did President Clinton. 2. You and I agree more than we disagree. Requiring insurance is a great idea! I would argue, though, that we need legislation to give people back the right to go to court with their claims. Right now, every dispute with a brokerage firm is forced into arbitration run by the securities industry. Of course, playing on its home court, the industry has a big advantage. It views arbitration claims as simply a cost of doing business. They have been willing to pay that cost because it provides no real accountability. If we require adequate insurance coverage and allow people to take their claims to court, that will be a big step forward.Finally, I would say that we have to give the SEC a much bigger budget. The agency is frightfully small. Administrations beholden to the industry have kept it that way on purpose. You see the results in things like the flash crash of May 6. The SEC must be able to monitor trading, but it is currently well behind the market technologically.Keep the good ideas coming. I appreciate the dialogue.Peace,Pat

  3. Thanks for the post, Mike. Valid question. At least part of the anewsr is the climate of deregulation that has been in place for the past thirty years. When smaller government rhetoric is the way to get elected and when securities industry political contributions dwarf anything individuals can contribute, the industry gets its way. Before the economic collapse of 2008 the SEC budget did not keep pace with rapid changes in the market. The SEC is a very small agency with an enormous task. Plain and simple, there are not enough cops on the beat. The economic crisis has finally loosened the purse strings a bit, and Mary Schapiro is providing good leadership. So, we’ll see, now that they are getting a bit more money, whether they can get up to speed. I pray that it is not too late. By the way, the SEC has always returned more money to the Treasury, through fines and fees, than it spends. For some reason, Congress has never allowed it to become self-funding. Call me cynical, but I think the reason is that politicians who are beholden to the industry do not want a well-funded SEC. The de-regulation crowd is already back at work, lobbying to take it easy on the securities industry. The only thing we can do now is vote for politicians who make securities industry reform a priority, and write our legislators.I was at the SEC during the de-regulation years. That is true. But my Enforcement Team did great work. We were not policy makers and did not work in Market Regulation. We were too busy tracking down insider traders, market manipulators, boiler-room operations, and scams of every stripe. So, I’ll push back on your accusation of incompetence.Peace,Pat

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