Near midnight, John Thain, Ken Lewis, and their teams were lifting champagne glasses, toasting the deal. Had they been able to foretell the future, they might have held off on the bubbly.
SIX
Fallout
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
—ALAN GREENSPAN IN CONGRESSIONAL TESTIMONY, OCTOBER 2008
SEPTEMBER 15, 2008
An image played in Win Smith’s mind as he watched the news of the sale of Merrill Lynch: a thundering herd of bulls storming over the horizon, joyfully kicking up huge clouds of dust as their giant hooves pounded into the earth. That was his Merrill, the company he loved, the company his father had joined in 1916 with the founders, Charlie Merrill and Eddie Lynch, to bring Wall Street to Main Street, a goal they achieved with bullish determination. But there was a second image Smith held in his mind, distinctly different but every bit as essential—the benevolent visage of “Mother Merrill,” the good soul of the firm. For if a firm could be said to have a soul, it was Merrill Lynch.
Winthrop Smith Jr., fifty-five, had personally known every Merrill CEO, from Charlie Merrill to John Thain—although he didn’t know Thain well. He grew up hearing the iconic tales of “Mother Merrill” at his father’s knee—how Merrill warned its clients to sell ahead of the crash of 1929, thus rescuing their investments; or of the time in the 1970s when a stock Merrill recommended crashed and CEO Don Regan (future secretary of the Treasury and then chief of staff in the Reagan administration) said outright, “We goofed,” and made investors whole. These were the stories everyone at Merrill loved to tell, believing they belonged to a unique bastion of virtue at the craven heart of Wall Street.
Smith had spent twenty-eight years there himself, rising to become executive vice president and chairman of Merrill Lynch International before leaving in 2001. Stan O’Neal had just been named chairman and CEO, and Smith was offered the vice chairmanship but declined to stay. Seven years later, he still felt so much pride in the company and its people. He had loved the underdog feistiness of Merrill, the strong leadership and warm heart that had characterized it for most of its history. Now Merrill’s motto, “We’re bullish on the future,” seemed like a relic of the past.
It was sad to say good-bye. But for Win Smith, the emotional end had come much, much earlier. He did not believe that the current subprime crisis had brought Merrill down. In the months and years preceding the sale, Smith had made no secret of his anger toward one man, who he believed was responsible for ruining a great company: Stan O’Neal, the CEO who had been forced out in 2007.
Smith was openly bitter about O’Neal’s tenure and the damage it had done to Merrill. Although O’Neal had received positive press as the grandson of a former slave and the first African American to run a major Wall Street firm, he was responsible for moving Merrill away from its core business into the lucrative (and ultimately fatal) subprime market. And then, much like Dick Fuld, he had failed to see the path of destruction until Merrill was already shaken. Shortly before his ouster in 2007, O’Neal told investors that the subprime problem was “reasonably well contained. There have been no clear signs that it is spilling over into other subsets of the bond market, the fixed income market, and the credit market.” He was wrong about that, of course, but being wrong did not prevent O’Neal from taking away a compensation package worth $161.5 million when he left. In Win Smith’s view, it was highway robbery.
There were those on the Street who said Smith’s anger was really just sour grapes, since O’Neal had beaten him out for the top job. I once asked Smith if that was true, and if O’Neal’s poor reception and ultimate ouster was a case of the old guard at Merrill taking aim at an outsider. He denied it vehemently. “What he did that made many of us nonsupportive was to publicly castigate Mother Merrill without understanding what Mother Merrill stood for,” he said. “It was really a culture built around five principles: [Number one,] the client’s interests must come first. Second, one was to respect one’s colleagues. Third, the firm relied on teamwork. Fourth, you had a responsibility to your communities. And fifth was integrity: you never did anything that you couldn’t read about on the front page of the Wall Street Journal. I don’t think those principles were something Stan embraced or articulated. He thought Mother Merrill stood for paternalism—softness—which it did not in any way.”
He admitted that he was disappointed to have been passed over as CEO. “Would I have loved to have had the job? Absolutely. Would I have totally supported any of the candidates if they had not taken the firm in a direction with which I didn’t agree? Absolutely. So no, I’m not bitter. I just do not agree with what O’Neal did, and I certainly don’t agree with the way he maligned a culture that had worked for almost ninety years.”
Now Smith watched the events unfolding that would bring an end to Merrill’s magnificent reign. He knew the sale was necessary. He was ready to support John Thain. But it felt like a death in the family.
I awoke hours before dawn on Monday morning and left the house at 5:45 for an early appearance on the Today show, which would be filmed live from the floor of the New York Stock Exchange. The overnight news, as expected, was terrible. The
