With a fervent belief in the small investor as the foundation of the stock market, “Good Time Charlie” made America the shareholder nation.
—TIME, 1998
© Bettmann/CORBIS
Throughout the early part of the twentieth century, individual investors in the securities markets were of two distinct—and opposite—types. At one end of the pole were very wealthy and conservative investors who were usually advised by one of the large banks. Their investments were made for the long term and were chosen among secure bonds and, less frequently, the common stocks of well-established rail or industrial corporations whose dividend-paying ability was never in question. At the other end were the speculators—often fancying themselves as operators—who purchased securities for short-term gains, basing their decisions on tips and often participating in pools and other price manipulation schemes. Some of the speculators were professional traders associated with a stock exchange or one of its member firms; others were amateurs who sporadically took a flyer on a highly touted stock—usually with an unhappy conclusion. The only thing these two investment types had in common was geography. They both tended to live in New York and other big cities. Middle-class citizens in America’s heartland tended to place their savings with insurance companies or, more often, with commercial banks or savings banks. Main Street had not yet met Wall Street.
That started to change with the advent of Liberty Bonds. Undertaken by the U.S. government to finance the country’s military efforts in World War I, the celebrity-led, patriotism-themed campaigns to sell the bonds covered every state in the nation and eventually raised $17 billion—the majority purchased in small-bond denominations by some eleven million citizens. When the war bonds came due, a small but nevertheless substantial minority of Liberty Bond purchasers reinvested the funds in other bonds or, less often, in the stock market. The Liberty Bonds became the gateway investment for a new middle-class investor and fostered a nascent retail securities market.
Two financiers seized the opportunity that the maturing Liberty Bonds presented: Charles (“Sunshine Charlie”) Mitchell, whom we met in the last chapter, and the more laudable Charles (“Good Time Charlie”) Merrill, whom we meet in this one. As their nicknames suggest, both were outgoing and optimistic by nature, and the early growth of their organizations—Mitchell’s National City Bank and Merrill’s Merrill Lynch—was due in no small part to their considerable abilities as salesmen. They were the promoters of “everyman capitalism,” the new and uniquely American phenomenon of ordinary investors making direct investments in the stock and bond markets.
The Difference Between Good Time Charlie and Sunshine Charlie
On the surface, Mitchell and Merrill had much in common. Unlike the aristocratic financial chiefs in charge of most of the major financial institutions of their day, neither Mitchell nor Merrill came from wealth or from banking families; they were born in solidly middle-class homes, Mitchell in Chelsea, Massachusetts, and Merrill in Glen Cove Springs, Florida. Both attended Amherst College, and both started their careers in other fields before ending up on Wall Street. Most crucially, both men recognized that the Liberty Bond sales would have lasting effects on how people saved their money—and would potentially expand the customer base and profits for their respective financial institutions.
Despite the outward similarities of Mitchell and Merrill, the advice their institutions offered could not have been more different. In their pursuit of outsized profits for the bank and bonuses for themselves, Mitchell and his far-flung sales force looked upon the new crop of Liberty Bond-primed investors as sheep to be shorn. When the investor demand that National City had created exceeded the issues that originated from the leading investment banks, the bank began to promote risky securities that the reputable investment bankers wouldn’t touch. And when the feverish bidding for existing stocks in the secondary market sent the stock market to irrational levels in the late 1920s, Mitchell chose not to heed the calls for restraint. On the contrary, he stoked the speculative fires by using his board position at the Federal Reserve to promote ample liquidity for the banks to make margin loans to investors to facilitate their stock purchases.
The advice coming from Merrill Lynch was far different.1 In 1928, while the markets were growing ever more frothy with the influx of new money from less than sophisticated investors, Charles Merrill was sending all-hands notices directly to the firm’s customers, urging special caution in their stock market investments and especially with respect to the use of margin account debt in financing them. “We do not urge that you sell securities indiscriminately,” one letter said, “but we do advise, in no uncertain terms, that you lighten your obligations, or better still, pay them off entirely.”2 Evidently, many heeded his advice. Shortly before the onset of the Great Crash, Merrill could report with satisfaction that the firm’s customers had greatly reduced their use of margin debt, and it is highly likely that they did better than most investors when the market crashed and then went into its long slide throughout the ensuing Great Depression.
The difference in the approaches to their customers—exploitive in the case of Mitchell’s National City Bank, responsible in the case of Merrill Lynch—would ultimately shape the directions of both institutions and the enduring legacies of the two men. As a result of Merrill’s policies and business philosophies, the average investor was finally offered the opportunity to participate in the securities markets with a reasonable prospect of success. With “account executives”—a term Merrill borrowed from the advertising business—carefully screened before hiring and then subjected to a comprehensive training program, Merrill Lynch transformed the image of the stockbroker from that of a fast-buck hustler to a professional. And the firm’s service to small investors was greatly enhanced by the production of professional research to aid them in determining the merits of securities. The retail securities business evolved from one fueled by tips and speculation to one in which investors were able to intelligently “investigate, then invest.” With vastly different business visions, Merrill Lynch prospered and National City Bank eventually disbanded its once large investment unit.
The retail segment of the capital markets, and in particular one that was fair and legitimate, is rightly associated with the rise and growth of Merrill Lynch. And Charles Merrill, with his forceful personality and commitment to the success of the individual investor, was the undisputed driver of this transformation. His story can be told through the three successive and distinct business ventures and business personas that he took on during his professional life: a scrappy investment banker who founded the original version of Merrill Lynch; a behind-the-scenes controlling shareholder who was responsible for much of the development and success of Safeway Stores; and finally and most enduringly, the visionary and chief executive of the second version of Merrill Lynch, one of America’s iconic businesses.
Act One: Investment Banker for the Retail Trade
Following an undistinguished academic career that began at Amherst and ended without a degree at the University of Michigan, Merrill leveraged his personal contacts and engaging personality into an entry-level job in 1909 with the firm of George H. Burr & Company. At that time, financial services businesses were not easy to categorize, and many provided a mix of unregulated financial services. Burr & Company was primarily a “factor,” meaning that it advanced money to retailers and other businesses that sold their wares on credit. Factors removed the collection uncertainties of credit-issuing retailers by buying the accounts receivable they created. Many of Burr & Company’s clients were chain stores that routinely extended credit to their customers—but in doing so often suffered a liquidity squeeze while they waited for those customers to pay their bills. Burr & Company and other factoring firms removed the retailers’ liquidity problems by buying their accounts receivable at a discount and then made money when the accounts were settled at full price.
Factoring was Burr & Company’s primary business and served as Charles Merrill’s introduction to the business of retailing. But not long after Merrill arrived at the firm, George Burr assigned to him the job of assisting the firm’s clients in raising longer term capital through the stock and bond markets. Burr & Company was not alone in expanding from short-term financing into the securities business; Goldman Sachs and Lehman Brothers, for instance, had their nineteenth-century origins as buyers and sellers of the IOUs that merchants used to finance inventories and receivables. When those firms developed into more broadly focused investment banking houses, many of their initial clients were retailers with whom they had long-standing relationships, including R. H. Macy’s, Gimbel Brothers, F. W. Woolworth, and Sears, Roebuck.
Burr & Company, likewise, focused on its major retail clients in its push into the securities market. Young Merrill, faced with doing an investment banker’s job within a factoring business, found that he excelled at his new position, and it ultimately served as the nexus for the two elements that would shape his career and the eventual creation of Merrill Lynch: investment banking and retailing. While at Burr & Company, he negotiated and sold a major securities offering for S. S. Kresge, which at the time was a fast-growing chain of variety—“five and dime”—stores. And though Burr & Company would remain an inconsequential player among Wall Street underwriters, the Kresge deal gave Merrill personal visibility on Wall Street; by the summer of 1913 he had taken a job at Eastman Dillon & Company, a substantial and prestigious investment banking firm.
That relationship, however, was contentious and short-lived. Eastman Dillon, like other established firms, was interested in financing railroads and “industrials” and found little it liked about the emerging chain store business. Merrill felt differently and on his own had built a book of business in the emerging retail industry. Yet the new corporate clients Merrill brought in were shunned by the Eastman Dillon partners, and he soon realized that he was doomed to go nowhere at the tradition-bound firm. Following arguments with Eastman Dillon’s managing partner over the firm’s refusal to handle a financing proposal he had prepared for up-and-coming chain store operator McCrory Stores, Merrill resigned in frustration. Shortly thereafter, at age twenty-nine, he launched Charles Merrill & Company, with one assistant and his longtime secretary as his first two employees.
Before long, the company became Merrill Lynch & Company with the addition of Edmund Lynch, Merrill’s friend and business associate, to the young investment banking partnership. Lynch, a former salesman of soda fountain equipment, brought little in the way of securities experience. But he was careful and methodical, and therefore an ideal complement for Merrill, who tended to be more intuitive and to jump at opportunities without full study. Lynch was comfortable with the operational aspects of Merrill Lynch, while the affable Merrill preferred functioning as the firm’s chief rainmaker, scouring the United States for new investment banking deals and clients. Theirs would become a long-lived and fortuitous combination.
The early version of Merrill Lynch was never in the same league as premier Wall Street firms such as Kidder Peabody, Dillon Read; Goldman Sachs; or Lehman Brothers, and was nowhere near J. P. Morgan or Kuhn, Loeb. But Charles Merrill was one of the few investment bankers of the time who understood the developing chain store business and could envision nationwide retail organizations, and as a result Merrill Lynch wound up as the provider of initial capital for the likes of S. S. Kresge, McCrory Stores, J. C. Penney, Western Auto, Walgreen Drugs, and—most importantly for Charles Merrill’s second career—Safeway Stores.
In the first version of Merrill Lynch, however, the firm acted not just as a traditional underwriter and wholesaler but also as an investor. While other investment bankers purchased a company’s securities with the intention of immediately distributing them to outside investors, Merrill Lynch and its partners, like today’s private equity firms, typically took personal investment positions in the stocks of their clients and negotiated attractive stock purchase options as part of the firm’s underwriting compensation. With the advent of comprehensive securities legislation in the 1930s, it became more difficult for investment firms to act as both principal and agent in new issues, but the formula worked well for Merrill Lynch at the time. By virtue of smart investing—and the ebullient stock market of the 1920s—Charles Merrill, Ed Lynch, and their junior partners had become very wealthy men, amassing a portfolio of stocks, bonds, and cash estimated at between $50 to $100 million.3
Through one of the best calls in the history of business, these men were able to retain much of their fortunes by unwinding their investment banking business just before the ravages to the stock market and the Great Depression set in. The partners of Merrill Lynch—as a result of extreme pressure from managing partner Charles Merrill—liquidated much of their common stock holdings in the final years of the Roaring Twenties. Between 1928 and 1930, when Charles Merrill was urging the firm’s customers to lighten their exposure to the stock market, he was following his own advice with respect to the entire firm. With his gloomy—but correct—view in 1928 that the stock market was due for a fall, he not only sold much of the firm’s stock holdings, he also transferred Merrill Lynch’s six retail brokerage offices to another firm and quietly disbanded the firm’s investment banking unit.
His decision to undertake a major liquidation was not universally popular with his partners, most of whom were more upbeat about the market than he—and also reluctant to face the tax consequences that would result from realizing gains as they turned their stock positions into cash. But Merrill, by force of personality as much as by the terms of the Merrill Lynch partnership agreement, had the ultimate say in the firm’s business. And what he was saying in 1928 and 1929 was that the party would soon be over and it was time to sell. After getting nowhere with polite cajoling, Merrill put his foot down and, in a letter to junior partner Sumner Cobb, he commanded that the firm’s portfolio of stockholdings, totaling near $50 million, be sold immediately, saying, “Nobody seems to give a damn and I don’t like it one little bit. You and Ed know my feelings, and you must let me decide when enough is enough.”4 Merrill went so far as to use the power of attorney he held over Lynch’s affairs to rearrange his vacationing partner’s personal holdings of stock.
Of course, Sumner Cobb, Edmund Lynch, and the other partners would ultimately be immensely grateful that their leader exerted a heavy hand in the firm’s well-timed liquidation. They wound up among a minority of Wall Street partners who entered the Depression years of the 1930s flush with cash and able to repurchase stocks at a fraction of the inflated values at which they were selling a few years earlier.
Act Two: Grocer
Following the winding down of its business, Merrill Lynch had shrunk to a one-office holding company, with Charlie Merrill and Ed Lynch serving as the two remaining partners and devoting most of their time to the oversight of a handful of large investments in selected companies, including a controlling interest in California-based Safeway Stores. But the two partners eventually took divergent paths. Ed Lynch maintained his business interests in the newly emerging motion picture industry, but most of his vast wealth and energies were directed toward country clubs and a life of hedonism. Sadly, his life of leisure was cut short by an untimely death in 1938 at age fifty-two while on an Atlantic Ocean voyage.
Throughout the Depression years, while Wall Street was in the doldrums, Merrill focused his interests on Safeway Stores. Upon the division of the firm’s investments among the partners, he wound up with an ownership position in the securities of Safeway that was sufficient to wield operating control of the Oakland, California–based food chain. He was never a full-time executive of the company and had no official title, but with transcontinental flight just becoming a practical travel option, he spent as much time in Oakland guiding the development of Safeway’s business as he did in his office in New York.
His time on the West Coast was much more satisfying than tending to his remaining business interests in New York. With the stock market mired in a long bear market, revenues from both the brokerage and the investment banking businesses had dried up. Between 1929 and 1938, brokerage commissions at U.S. investment firms fell by roughly 80 percent. And the investment banking business wasn’t much better. Despite some pickup in the underwriting of stocks and bonds in the mid-1930s, another setback in the economy in 1937 put the new-issue market and investment banking side of the business on the skids once more. At the same time, E. A. Pierce & Company—the forty-office retailer that had assumed Merrill Lynch’s retail business—hovered close to insolvency and survived the trading drought of the 1930s only through the lifeline of a $5 million investment from Charles Merrill, Ed Lynch, and other of their partners.
Safeway Stores, though clearly affected by the ravages of the Depression, presented a much less grim picture. Investors might stop trading securities, but families still had to eat. With over three thousand stores in 1930—the second largest U.S. grocery chain behind A&P at the time—Safeway enjoyed the scale and buying power to outperform, and in many cases to simply outlast, its smaller rivals. Moreover, the chain was in the forefront of a new model of grocery store, one that reduced labor costs by replacing clerks with customer self-service and eliminated traditional services such as delivery and credit sales in exchange for lower food costs.
Merrill delivered value to Safeway far beyond that expected of an outside investor. Using the deal-making skills he had honed on Wall Street, he attracted top managers to Safeway by designing compensation packages that tied their performance to ownership of the company’s stock. He also negotiated a host of strategic acquisitions that expanded the chain’s geographic reach and put his Wall Street experience to good use in effectively tapping the financial markets to support the company’s growth.
But just as surely as Merrill’s Wall Street acumen helped develop Safeway during the Great Depression—and continued to build his fortune in the process—the lessons he learned about running a high-volume, low-profit margin business sparked the seminal ideas for the second version of Merrill Lynch and the third act of Charles Merrill.
Act Three: Wall Street Retailer
While Merrill’s attention was on Safeway, E. A. Pierce & Company languished. The firm stayed true to its goal of becoming the nation’s premier retail broker. And as a result of its absorption of the six Merrill Lynch offices in 1930 and the acquisition of other smaller retail chains, E. A. Pierce had grown to be the country’s largest stockbrokerage by the end of the decade. But in reality, the firm was just limping along and few of its forty offices were operating profitably.
At the time E. A. Pierce’s partnership agreement was near its legal expiration in early 1940, liquidation looked like a sensible, and perhaps the best, alternative. As a result of continuing losses, the firm’s capital was nearly depleted, and there was little relief in sight. With the seemingly endless economic malaise overhanging the country, securities trading slowed to a trickle on the New York Stock Exchange, and more individual investors were closing accounts than were opening them. Yet it was in that year, with E. A. Pierce and the rest of the securities industry on their last legs, that fifty-four-year-old Merrill decided to return to Wall Street full-time and take over as managing partner of the firm.
This time, however, he envisioned a Merrill Lynch far different from the firm that had gone dormant in the 1930s. The new firm would be recapitalized and reinvigorated with a business philosophy and operating style far different from the informally managed partnership model that characterized the investment banking world. He planned to transplant the organizational structure of a large corporate organization to Wall Street and to that end needed to make E. A. Pierce, already a sizable securities retailer, even bigger. He merged the E. A. Pierce organization with another large brokerage firm of the day, Fenner & Beane, to form Merrill Lynch, Pierce, Fenner & Beane. And with that, Charles Merrill became the majority owner of what was by far the country’s largest retail sales force.
In its second life, Merrill Lynch emerged as a one-line business: securities retailing. Whereas the original Merrill Lynch made its money primarily from investment banking and investing in corporate clients, in its 1940 reincarnation the firm ceded the moribund corporate finance side of the business to the established investment banking houses and concentrated on the small investor. Investment banking made Merrill a very wealthy man, but from now on he would dedicate much of his fortune to a radically new business plan that had the individual investor as its sole focus.
Merrill was confident that he could duplicate Safeway’s success at Merrill Lynch with a similar customer-focused business mission that entailed “bringing Wall Street to Main Street.” His idea went counter to orthodox thinking in a business that saw quick profits and big deals as the path to riches—and in which “buyer beware” was the watchword for customers. Besides, the numbers of the retail sector of the investment business were going the wrong way. Based on statistics compiled by the New York Stock Exchange, the number of U.S. households with active brokerage accounts continued to shrink and, at around one million in 1940, was substantially lower than it had been ten years earlier.5 But despite the gloom that had prevailed over the investment business, Merrill, with the benefit of a decade of firsthand retail experience in the everyman business of food retailing, was sure that by regaining the trust of small investors Merrill Lynch would eventually succeed.
In addition to his high self-regard for his abilities and vision, Merrill, unlike the vast majority of his Wall Street contemporaries, believed that the regulatory changes of the New Deal were highly supportive of his retail-focused plan. For one thing, the Glass-Steagall Act of 1933, which separated the securities business from the commercial banking business, forced National City Bank, Chase National, and other commercial banks to disband their securities affiliates; now the business of the retail investor belonged solely to investment firms. Equally important, the fairness requirements of the securities legislation of 1933 and 1934 provided for a heightened transparency and truthfulness in the sale of securities to all investors. The new regulations were not going to immediately bring back the many ordinary investors who had been victimized by the manipulations of investment pools and insider information schemes of the 1920s, but at least the groundwork had been laid for an operating philosophy based on trust rather than suspicion. With the federal government’s new set of rules and regulations, individual investors had the comfort of tough legal enforcement to back up the legitimacy of their transactions in the markets. Indeed, from the standpoint of the new Merrill Lynch, the securities legislation was a vital component of a marketing plan that would be based on restoring and maintaining customer confidence and a business model in which “know your customer” was a crucial requirement for success.
Merrill took the opportunity of an April 1940 branch manager meeting at New York’s Waldorf Astoria Hotel to set forth his vision for the newly established Merrill Lynch. Merrill opened his speech by saying, “Although I am supposed to be an investment banker, I think I am really and truly a grocery man at heart. I have been in the chain store business, you know, ever since 1912.”6 Over the next two days, he and his partners laid out the particulars of a revolutionary new retail business plan that would blossom into one of the most successful American enterprises of the twentieth century.
The overarching theme of the branch manager conference was customer trust and a necessary reinvention of the sales function to earn it. In order to make all investors feel welcome to do business with the firm, the so-called odd-lot investors—those who traded stocks in fewer than the standard 100-share round-lot denominations and were generally unprofitable and shunned by Wall Street brokers—were no longer discouraged from doing business at Merrill Lynch. From now on, Merrill Lynch would absorb those losses willingly as a front-end cost to nurture an investor loyalty that would prove profitable as the customers became more substantial investors in the future.
The treatment of the firm’s customers, actual and prospective, switched from solicitation to consultation. Rather than using the typical hard-sell approach, with the customer being lured into a trade based on a stockbroker’s feel for the market—or, even worse, tips—the assembled branch managers were instructed to bring the customer further into the decision making process, abiding by Merrill’s long-used maxim to “investigate, then invest.” That simple piece of advice became omnipresent in Merrill Lynch sales materials, and it was backed up by a research department, separate from the sales organization, that assisted customers at no charge in their investment investigations.
Much more often than before, the newly named account executive would be recruited from the ranks of college graduates, whose diplomas evidenced brain power and who were not beholden to the conventional thinking of the old-timers in the securities business. Since courses in securities analysis were not offered as part of a college curriculum at that point, Merrill Lynch developed supplemental training programs, and all prospective account executives were required to spend their first six months at the firm’s New York headquarters learning the basics of the business. That, too, was a radical and expensive policy, but Merrill viewed it as a necessary investment for the quality firm he wanted to build. There was always the risk that the young and well-trained brokers would be hired away by a rival firm, but the practice continued with apparent success for many years.
But Merrill did not stop with the upgrade in the quality of the firm’s account executives. He also radically changed the way they were compensated. Merrill was an early user of market research, and a study he commissioned found that brokerage firm customers were highly suspicious of the motives of stockbrokers. That led to a new compensation scheme in which the account executive’s pay at Merrill Lynch was switched from the industry standard commission-per-trade basis to a yearly salary plus bonus. The main purpose of the change was to prevent commission churning, a practice in which brokers encouraged frequent and unnecessary adjustments in their clients’ portfolios solely to generate commissions from the buying and selling of the securities. Providing fixed salaries lessened that temptation and reassured customers that recommended securities transactions were in their best long-term interest—rather than in the best short-term interests of the salesperson.
The determination of the account executive’s pay package was made by the branch manager, whose role also underwent drastic change. Rather than being a commissioned producer with side administrative responsibilities for managing the branch office, he—or very rarely she—was now a full-time manager whose job was to run the branch for maximum productivity, including supervising and recruiting the highest-quality sales and administrative employees. The branch manager was also charged with acting as the firm’s official representative in the geographic region served by his or her branch.
To alert the country and potential customers to these extensive structural changes, Charles Merrill again broke with the status quo and undertook a major advertising campaign. Merrill was a longtime proponent of advertising and had used well-targeted ads to attract investment banking business as far back as his days at Burr & Company—a time when the old-line investment banks were disdainful of as much as a sign on the door. Even at mid-century, advertising in the securities business was not widespread and still somewhat suspect. The New York Stock Exchange, employing that mind-set, imposed limits on the scope of advertising it allowed its member firms to employ.
Whatever those NYSE limits might have been, Merrill Lynch may have tested them with its large and conspicuously placed print ads. The firm put its full-page, education-oriented ads in the nation’s major newspapers, the first being a six-thousand-word attempt to explain the securities markets on a single broadsheet. It was titled “What Everybody Ought to Know About This Stock and Bond Business” and read more like an academic primer than a punchy sales piece. But the ad became famous and ran through most of the 1940s, prompting about three million requests for reprints. It was a masterstroke that served to associate Merrill Lynch with serious and responsible investing. The ads caught the attention of the emerging middle-class investor in the post–World War II years—and a high percentage naturally gravitated to Merrill Lynch when it was time to consider the purchase of stocks and bonds.
Charles Merrill was the acknowledged mastermind behind the revolutionary new Merrill Lynch—now dubbed “We the People” and “The Thundering Herd” by a still-leery Wall Street—and the firm became one of the most successful businesses and recognized brands on the globe. Sadly, a debilitating heart attack in 1944 limited Merrill’s direct involvement in the firm to just a few years. After that time, until his death in 1956 just a few days shy of his seventy-first birthday, he rarely visited the New York headquarters or any of the branches. He remained the firm’s chairman of the board and its major shareholder, but his hands-on management days ended with the onset of his illness.
The business he conceived, however, continued to thrive during his lifetime, and Merrill Lynch accounted for an ever-growing percentage of the trading volume on the New York Stock Exchange. And that volume itself was increasing at a fair clip in the 1940s. After a short fall-off in stock trading in 1941 and 1942 with the onset of World War II, business picked up in the later war years and, with the end of the conflict and the government no longer sopping up investment dollars to support the war effort, new stock and bond issues once again boomed. By the war’s end in 1945, more than twelve hundred companies had their stock listed on the New York Stock Exchange.
Merrill Lynch prospered as well with wartime growth. In its first full year in business, 1941, the firm realized revenues of $8.6 million and a partnership profit of approximately half a million dollars; in 1945 the revenues had more than tripled to $28.1 million and pretax profits climbed to $8.8 million; and at the time of Merrill’s death in 1956, revenues and pretax profits were around $70 million and $16 million, respectively.7
The firm accomplished that remarkable growth and profitability by staying true to its retail investor orientation, generally eschewing business with institutional customers such as insurance companies and pension funds, and limiting its investment banking business to selling new issues originated by other firms. By the mid-1950s the firm had over one hundred retail offices and four thousand employees, both measures roughly double the levels at the time of the firm’s 1940 makeover. By the time of Merrill’s death in 1956 his firm was serving nearly half a million investors and remaining by a wide margin the nation’s largest broker.8
It was no surprise that Merrill Lynch’s success attracted the notice of some of Wall Street’s older firms, who transformed themselves into “wire houses”—investment firms with national branch systems connected at the time through telephone or telegraph lines. E. F. Hutton, Bache, PaineWebber, and Dean Witter began to more actively solicit retail investors across the country, while scores of regional firms headquartered in all the major cities served the small investor through their own branch networks. Data on the total number of retail customers the wire houses actually served in their early years is difficult to come by, but by any reasonable measure it was a good business to be in during the mid-twentieth century.
One such measure of the vibrancy of the retail business is the growth in the number of individuals owning common stock. As Merrill was winding up the business of the first version of Merrill Lynch in 1928, media accounts made it appear that “everybody” was buying and selling stocks. Stories abounded about stock tips passed to and from alert barbers, chauffeurs, and shoe shiners. But the actual figures show that the stock market was mainly a spectator sport at that time for the vast majority of Americans. Around 1.5 million people actually owned any shares of common stock in 1929, a little more than 1 percent of the country’s population of roughly 120 million.9 So it is unlikely that more than 1.5 percent of the adult population were stockholders. In 1952, however, when the Brookings Institution conducted the first “scientific” study of stock ownership, it found that the number of U.S. citizens owning common stock had grown to 6.5 million, with 1.3 million of those stockholders purchasing their first shares in the three years prior to the study. When the study was duplicated in 1956, the results showed even stronger growth, with an additional 2.1 million shareholders, pushing the total number to 8.6 million.10 Looking at the numbers in a different way, near the height of the speculative fervor of the 1920s, maybe one out of seventy adult Americans owned stock; in the year of Merrill’s death in 1956, that ratio became one out of twelve. By the end of the long-run bull market that extended from the mid-1950s until 1969, the New York Stock Exchange reported that approximately 30 million adult Americans owned stock, representing one of every four adults.11
While Merrill and the firm he created prospered, they also rescued the reputation of the investment business from its sordid state. The creation of a fair and legitimate retail segment of the capital markets was a singularly American phenomenon, and today, with roughly half of U.S. adults now investing directly or indirectly in securities, the United States remains an outlier as far as the percent of individual participation in the market. Merrill Lynch played no small part in this development, and Charles Merrill’s biographer, Edwin J. Perkins, puts him in the pantheon of the world’s most influential men of finance:
As result of his achievements, Merrill’s influence equaled the impact of all previous American financiers, including his only legitimate rival, J. P. Morgan. In democratizing the stock market, Merrill created an enterprise that gave middle-class households access to a far wider range of investment opportunities. He truly brought Wall Street to Main Street.12
Though there are no reliable measures of the level of investment success Merrill Lynch’s half-million retail customers actually enjoyed, the progressive and even-handed manner in which they were treated no doubt led to their prosperity as well. Charles Merrill’s personal life had its share of imbroglios; with his flashy lifestyle and succession of trophy wives and extramarital affairs, “Good Time Charlie” was a fixture in the New York gossip columns. But with respect to his firm’s customers, he can fairly be described as having done well by doing good.
Merrill Lynch After Charles Merrill
The Merrill name has always remained at the lead of whatever string of names would identify it over the years, but no Merrill heirs have had any significant participation in the business affairs of the firm since Charles Merrill’s death. His older son, Charles Jr., has spent his life in education, founding and serving as headmaster of a private school in Boston; a younger son, James, was a novelist and poet. Both sons, while independently wealthy as a result of their father’s success, showed no interest in a career in the investment business and, because he was somewhat dictatorial and difficult in his domestic life, they kept a distance from him.
A strong business lineage was carried forward, however, by Robert Magowan, husband of Charles Merrill’s third child, Doris. Neither Doris nor Robert showed any apparent scarring from Merrill’s strong personality or scandalous personal life, and Robert played an important role in the development of Merrill Lynch during the 1940s and early 1950s. He also gravitated to Charles Merrill’s earlier business love, Safeway Stores, and Magowan and later his son served as able CEOs of the grocery chain through the second half of the twentieth century.
Merrill Lynch prospered through the 1950s and 1960s, remaining the country’s largest and most successful retail brokerage operation by adhering to the tenets of its founder. To a large extent, Merrill’s vision was preserved through a promote-from-within strategy, and the top management of Merrill Lynch was populated mainly with those who learned the “Merrill Lynch way” by starting out as account executive trainees and working their way up from the ranks. A high-profile example of that path to the top was Donald Regan, who, despite his Harvard College degree and experience as a decorated lieutenant colonel in the Marines during World War II, started at the bottom as one such trainee in 1946. By 1971, he had become Merrill Lynch’s CEO, a position he held for ten years before moving to Washington to serve as President Ronald Reagan’s secretary of the Treasury and later his chief of staff.
When Regan took the reins of Merrill Lynch in 1971, the firm was not considerably different from the highly successful retail-oriented business that Charles Merrill had presided over a few decades earlier. But the scale of its business had changed, with the number of branch offices and account executives growing exponentially as Merrill Lynch became the main beneficiary of the widening participation by an expanding American middle class in the stock market. Arguably, Merrill Lynch was not just the fortunate participant in the growth of the retail investment business but, as a result of its relentless advertising and financial education programs and through its refreshingly responsible approach to customer service, was itself one of the reasons for that growth.
Whatever its larger role in the securities industry, through the 1960s Merrill Lynch had prospered by remaining true to its single-minded mission of providing high-quality retail brokerage services. But in the 1970s, under the guidance of Regan, the soul of the firm began to change with two new and interrelated strategies: raising large amounts of capital and diversifying its operations beyond a retail focus. First, the company converted from a partnership to a corporation and later launched an initial public offering, becoming the second investment firm to go public and the first member firm to have its own shares listed on the New York Stock Exchange.
Regan had earlier bemoaned the difficulties of managing a partnership and the near impossibility of raising growth capital in that format. In his memoirs he wrote, “I can recall myself the day when Merrill Lynch had 117 partners. That made for a huge and unwieldy kind of organization, and whenever there was a need for additional capital the managing partner would go around to each of the partners and ask for additional capital contributions in order to finance Merrill Lynch’s growing business.”13 Public ownership, in Regan’s view, served as a solution to both the management and capital impediments of a partnership form of organization. By dint of its 1971 initial public offering, Merrill gained access to large amounts of external capital and became the largest investment firm in the world—no longer just in terms of employees but also in terms of its balance sheet.
With capital no longer a constraint, Merrill Lynch, over the less than glorious remainder of its history, widened its mission far beyond retail brokerage and launched a diversification strategy aimed at expanding Merrill Lynch into a “financial supermarket.” During the Regan years of the 1970s, Merrill Lynch entered the insurance business by buying the Family Life Insurance Company, and then, with a string of real estate–related acquisitions, it became a major presence in real estate brokerage, relocation services, and mortgage finance.
In addition to acquisitions, the firm also pursued an internal diversification program, making major pushes into institutional sales, trading, and investment banking. The aim of the investment banking initiative was to garner underwriting business by convincing corporate CFOs that Merrill Lynch’s vast retail and institutional sales capabilities would enhance the success of new public offerings. It was a sales pitch that worked well and put the firm among the top underwriters of new issues.
However, the Merrill Lynch name still did not have the cachet of the more prestigious, relationship-based securities originators such as Goldman Sachs, Morgan Stanley, or First Boston. Merrill Lynch was typically brought in as a comanager of a deal, forgoing the greater prestige and higher fees of the “book running” managing underwriter. In an attempt to remedy that situation, Regan engineered the acquisition in 1977 of White, Weld & Company, an old-line investment banking house. Merrill Lynch was only marginally successful in retaining the more talented members of that white-shoe firm, but the acquisition did set in motion a program to recruit and develop its own high-quality investment bankers.
In the 1980s, under the direction of a new chief executive, William Shreyer, the firm shed its real estate–related businesses and launched a major international initiative and doubled down on its investment banking and trading operations. That strategy was generally successful but had its share of ups and downs. Presaging the Wall Street–wide excesses that led to the 2008 financial crisis, in 1987 Merrill Lynch lost a Wall Street record $377 million in one day on ill-conceived mortgage banking trades. And then, in 1994, it entered into a $437 million settlement with Orange County, California, in connection with derivative trades gone bad. It became a byword on Wall Street that “whenever there was a calamity, Merrill Lynch was there.” But despite the missteps, by the beginning of the twenty-first century Merrill Lynch had become a powerful global securities firm. It sat atop the rankings of investment bankers in terms of new underwritings and established a major presence in wealth management. The firm earned handsome returns on its shareholders’ investment and the price of its stock soared to an all-time high by the beginning of 2001.
Unfortunately, things changed later in that year when Stan O’Neal was appointed president and soon thereafter CEO. In what ultimately resulted in the end of Merrill Lynch’s independence, the firm grew prone to taking big risks. Unlike Charles Merrill, who sized up Wall Street’s risks during the 1920s and went directly counter to most other firms, O’Neal and his new management team had a follower mind-set. Like many of the other major Wall Street firms, Merrill Lynch loaded up its balance sheet with the exotic mortgage-backed securities that would shortly become “toxic assets.” Soon after its marriage of convenience with Bank of America, those assets ultimately required the bank to take an extra $20 billion from the Troubled Asset Relief Program to handle its Merrill Lynch–related problems as part of the U.S. government’s 2008 Wall Street bailout.
Charles Merrill would not have been happy to see what happened to his creation. Under the direction of the empire-building management that followed him, the last several decades saw a transformation of Merrill Lynch from a dominant retail brokerage business into an unwieldy and unfocused financial conglomerate. The new version of the firm now occupies a backseat in the “big city, bright lights” businesses of investment banking and trading, while its retail operation, having long abandoned customer confidence-building initiatives such as a salaried sales staff, is just another financial services provider under the umbrella of Bank of America. Its account executives, who at one time set the industry standard, are no better or worse in the public’s eye than the rest of the salespeople in the investment business.
In the end, the plight of Merrill Lynch confirms the Bogle rule, set forth by John Bogle, who is the subject of this book’s next chapter: “When an institution goes down, one condition may always be found: It forgot where it came from.”14
