A former Merrill Lynch insider — and son of one of the firm's named partners, Winthrop H. Smith — dug through the firm's archives and his memories to write a kaleidoscopic history of the investment bank and brokerage in a new book called “Catching Lighting in a Bottle: How Merrill Lynch Revolutionized the Financial World.”
Winthrop H. Smith Jr., 64, said he used the project in part as a way to get to know his father better. The elder Mr. Smith, who eventually served as Merrill's chief executive and was a close confidant of founder Charles E. Merrill, died when his son was just 11. The young Mr. Smith, also a former senior Merrill Lynch executive, left the firm after a falling out with former chief executive E. Stanley O'Neal. In 2008, with Mr. O'Neal at the helm, the firm collapsed under the weight of subprime mortgages and was acquired by Bank of America Corp.
Now as Merrill Lynch marks its 100th anniversary, Mr. Smith spoke with
InvestmentNews about the firm's history and the future of the wealth management industry.
(See also Barry Ritholtz's take on the big anniversary: Happy 100th birthday, Merrill Lynch. We miss you)
InvestmentNews: Why take the time to write this book?
I didn't want the history of Merrill to be known and remembered just for 2007 and 2008, and I didn't want some of the revisionist history about what Mother Merrill [as the firm is sometimes called] was said to be that wasn't to be out there. For me, it was a bit of closure but also it was really letting all of the Merrill family celebrate what we had and letting the next generation of Merrill people know what the true story of the firm was. It turned out to be a lot of fun because I thought I'd learned the history, but by going back and going through the archives I really learned even more than I had before.
InvestmentNews:Given how much the business has changed in the last several decades, what can brokers take away from the firm's history?
Winthrop H. Smith: I think they have to go back and look at those founding principles. You've got to start with the belief that the clients' interests have to come first. You've got to be all about serving the client, acting with integrity, doing the right thing, and the advisers that do that are going to have a very successful career.
I saw a change when people started to talk more about counterparties than they did clients. That was a sea change, not just at Merrill Lynch, but for the industry. And I think the industry needs to come back to that core value and regain the trust on Main Street that it really doesn't have today as an institution. The individuals do. A good broker, a good investment banker still has that relationship with their client, but the institutions don't have that trust and respect, and that needs to be brought back.
InvestmentNews: Can the early Merrill culture be restored given the fact that it's now part of a larger company?
Mr. Smith: I think it can. I think it's harder. I think that John W. Thiel, who is running Bank of America Merrill Lynch, has really tried to celebrate the culture. I think Bank of America's been very smart to keep the Merrill Lynch brand because it's a tremendous brand. The Merrill Lynch bull was an icon. That was a household name. It was known for integrity; it was known for innovation. There are very few [brands] in the world that are that strong. If Coca-Cola ever changed its brand, it'd be done.
And when I talk to advisers they see some real benefits by being part of the bank — some products that Merrill Lynch didn't have. There can be some really nice synergies.
But you are also seeing boutiques grow up. And there are people that don't want to work for big institutions. [That trend] has always been there, and I think it will continue. Merrill was a boutique at one point in time. Good boutiques can get into the business a lot easier than they could in the past — the barriers to entry are lower — and so it's very possible to start and outsource clearing, outsource operations. You are going to see some very good boutiques emerge.
InvestmentNews: Is that a threat to the wirehouses?
Mr. Smith: I think they can be in a cumulative sense. If the boutiques can prove that they're better, they'll succeed. So the big banks have to really make sure they're client-centric, flexible, and quick on their feet — and that they continue to innovate. If they become bureaucratic and staid, then that's what kills a big institution.
And that's what Merrill did. It's why we were so successful against the banks. They were very slow-moving. Regulation was part of that. When [in the 1970s] you had regulation that limited the amount of interest you could pay an investor, that's where Merrill Lynch innovated with the cash management account and disintermediated the banks through that fast movement and innovation.
InvestmentNews: Your book talks at length about how Merrill Lynch's early culture was contrasted with white-shoe firms, in terms of both their employees and clientele. But the brokerage business now focuses on the überwealthy. Has the securities industry lost touch with the common man?
Mr. Smith: The economics of the business have changed. It's far more difficult to serve the individual client the way Merrill Lynch did in the '40s and '50s. Every firm has to evolve and change — you can't be all things to all people — people who do that fail. Merrill understood in the '70s and '80s it really had to be more focused on a wealthier client. The smaller clients are going be served by investing in different mechanisms. The advent of the 401(k) is a great plan for people that are employed. People can open IRAs now.
InvestmentNews: Is there anything you left out of the book?
Mr. Smith: What I didn't do is — it's like in a family you can always pick on a sibling when they're at a weak moment, but that doesn't describe them as a full person. I'd never go into that type of scenario where people look silly or foolish because I didn't think that represented the quality of a person.
InvestmentNews: That's not a courtesy you extended to Stan O'Neal.
Mr. Smith: I didn't have to tell the story of Stan. I just amplified it. But it's well-documented, factually, what he did. People lost their net worth. Too many Merrill people overconcentrated in Merrill stock because they believed in it. A lot of people said, “This regime will pass, this episode will pass.” Most people, including people who retired, didn't sell their Merrill stock, even though they didn't like what was happening.
You bet, there's a lot of pain and animosity and anger that one person and a small group of people could have taken down a firm like Merrill Lynch. I was one of the lucky ones that I decided a little bit impulsively to sell the stock, but it turned out to be a very wise move.
InvestmentNews: Why is this history important to the general public?
Mr. Smith: It's really important that people don't think Wall Street is an evil empire. Wall Street serves an incredibly important aspect of our economy and should be the intermediation mechanism where savings flow into investment. That's what Merrill and my dad did in the '40s. You want the individual putting their capital to work. You don't want them in a mattress. You don't want them only in a bank. You don't want them only in money-market funds. You want them investing in growing economies of our country and the world, in equities. And in order for people to do that, they have to have trust that they can do it, that there is the right supervision. They have to know what they're doing. A lot of people are losing faith in how to invest. They see the fluctuations, they see the volatility. And that's tough, because if you mark to market your portfolio every day, it's kind of hard to step back and look at the long term.
InvestmentNews: Does the negative public perception of Wall Street trouble you?
Mr. Smith: I really hate to see characterizations where the 1% are evil. Some of them are, but most of them aren't. The 1% do create jobs. They do pay the majority of taxes. They are contributors to charity. But some good people have been overturned by a few really greedy people.
Some Wall Street CEOs are out of touch. When you're paying yourself $30 million or $40 million when the world is going to hell, that gets picked up in the press. How the hell can you get bailed out by the government and still get paid huge bonuses? There should be a time when people say I'm not taking a bonus this year, and they didn't do that.
