SHIHAB KAMAL MUNSHI CORPORATE FINANCE ID:2233061018

Merrill Lynch BANK

Starting as a bond seller in 1914, Merrill Lynch transformed into a major investment firm. They became known
for opening up stock market investing to everyday people through their full-service retail brokerage model. This
innovation fuelled their growth throughout the 20th century. However, risky investments in subprime mortgages
and CDOs during the 2000s led to massive losses when the housing market crashed. Facing bankruptcy, Merrill
Lynch was acquired by Bank of America in 2009. While they no longer operate independently, their story serves
as a reminder of the importance of responsible risk management in the financial world.

As clarified earlier, Merrill Lynch wasn't a traditional bank, but rather an investment firm that later offered some
banking services. Here's a more complete history of Merrill Lynch:

Founding and Early Growth (1914-1940s):

 1914: Founded by Charles E. Merrill on Wall Street as Charles E. Merrill & Co., specializing in selling
bonds.
 1915: Partnered with Edmund C. Lynch, becoming Merrill, Lynch & Co.
 Focus: Underwriting securities, particularly for growing chain stores like Safeway.
 1930: Briefly ventured into retail brokerage but then refocused on investment banking.

Post-War Expansion and Innovation (1950s-1990s):

 1958: Became a member of the New York Stock Exchange, a significant milestone.
 1960s-1970s: Pioneered the concept of a full-service retail brokerage, making stock market investing
more accessible to individual investors. This innovation transformed the financial landscape, making
Merrill Lynch a household name.
 Growth: Became a dominant force on Wall Street, known for its aggressive sales tactics and iconic
bull sculpture symbolizing market optimism.

Challenges and Controversies (1990s-2000s):

 1990s: Faced a major financial setback due to a settlement with Orange County, California, related to
risky investment recommendations. This event tarnished its reputation.
 Mid-2000s: Heavily invested in subprime mortgages (loans to borrowers with poor credit history) and
complex financial instruments called Collateralized Debt Obligations (CDOs). These investments were
initially profitable due to strong ratings, but masked underlying risks.

The Downfall and Acquisition (2007-2009):

 2007: The housing market collapsed, causing the value of subprime mortgages and CDOs to plummet.
Merrill Lynch suffered massive losses as a result.
 2008: Mounting losses and a loss of confidence from investors led to a liquidity crisis, where the
company struggled to raise cash.
 2009: To avoid bankruptcy, Bank of America acquired Merrill Lynch. This marked the end of Merrill
Lynch as an independent entity.

Present Day (2009-Present):

 Merged into Bank of America and operates as its wealth management division.
 Focuses on providing investment and financial planning services to individual clients.

Legacy:

While Merrill Lynch played a significant role in democratizing investing for average Americans, its aggressive
pursuit of profits and risky investments ultimately led to its downfall. It serves as a cautionary tale about the
importance of responsible financial practices and risk management.

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SHIHAB KAMAL MUNSHI CORPORATE FINANCE ID:2233061018

THE FAILURE OF MERRILL LYNCH BANK

Merrill Lynch's failure can be attributed to a combination of factors, but the key culprit was the subprime
mortgage crisis and its heavy involvement in collateralized debt obligations (CDOs):

 Subprime Mortgages: Merrill Lynch significantly increased its investment in risky subprime
mortgages (loans given to borrowers with poor credit history). When the housing market collapsed,
these mortgages defaulted at a high rate, causing huge losses for the bank.
 CDOs: Merrill Lynch heavily invested in CDOs, which are complex financial instruments backed by
bundles of loans, including subprime mortgages. These CDOs were rated as safe by credit rating
agencies, but when the housing market crashed, the value of the underlying mortgages plummeted,
making the CDOs worthless.

Here's a breakdown of how these factors played out:

1. Heavy Investment in Risky Assets: Merrill Lynch significantly increased its exposure to subprime
mortgages (loans given to borrowers with poor credit history) and related financial instruments called
Collateralized Debt Obligations (CDOs). These assets were complex and risky, but their initial strong
ratings and revenue contribution masked the underlying danger.
2. Mounting Losses: As the housing market declined and mortgage defaults rose, Merrill Lynch suffered
significant losses on its subprime mortgage portfolio and CDOs.
3. Liquidity Crisis: As losses piled up, investors and trading partners lost faith in Merrill Lynch's
solvency (ability to meet its financial obligations). This led to a liquidity crisis, where the bank
struggled to raise cash to cover its debts.
4. Loss of Confidence: The mounting losses eroded investor confidence in Merrill Lynch's solvency
(ability to meet its financial obligations). Banks became unwilling to lend money to Merrill Lynch,
further crippling its liquidity (ability to access cash).
5. Rescue or Fail: With mounting losses and a liquidity crisis, Merrill Lynch faced a stark choice - find a
buyer or go bankrupt. Bank of America stepped in as the rescuer, acquiring Merrill Lynch in 2009.

In conclusion, Merrill Lynch's failure resulted from its aggressive pursuit of profits through risky subprime
mortgages and CDOs. The housing market collapse exposed these risks, leading to massive losses and
ultimately, its acquisition by Bank of America.

SURVIVAL OPTIONS

Here are some potential options Merrill Lynch could have explored to avoid failing completely, though some
might have been more realistic than others:

A. Risk Management Strategies:

 Reduce Exposure to Subprime Mortgages and CDOs: This would have been the most crucial step.
Recognizing the increasing risk in the housing market, Merrill Lynch could have started divesting from
subprime mortgages and CDOs much earlier. This would have limited their losses when the market
crashed.
 Increase Capital Reserves: Building a stronger financial buffer by increasing capital reserves would
have allowed Merrill Lynch to absorb some losses without facing a liquidity crisis.
 Improve Risk Assessment: Implementing stricter risk assessment practices would have helped them
avoid investing in overly complex and risky financial instruments like CDOs without fully
understanding the underlying risks.

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SHIHAB KAMAL MUNSHI CORPORATE FINANCE ID:2233061018

B. Strategic Measure:

 Hedge Against Losses: Employing financial instruments like hedges could have helped Merrill Lynch
mitigate losses from their subprime holdings. However, the effectiveness of this approach would
depend on market conditions and accurate risk assessment.
 Merge with a Stronger Bank Earlier: Instead of waiting until the brink of collapse, Merrill Lynch
could have explored a merger with a financially sound bank earlier. This would have provided them
with immediate access to capital and potentially avoided a fire sale of assets.
 Focus on Core Business: Shifting focus back to its core business of wealth management and
traditional investment banking could have minimized exposure to the risky mortgage market.

It's important to note that some of these options might have been difficult or impossible to implement:

 Market Conditions: By 2008, the financial crisis was well underway. Divesting from risky assets or
finding a strong merger partner might have been challenging in such a volatile market.
 Management Decisions: Merrill Lynch's management may have been reluctant to acknowledge the
true risks involved in their investments, leading to delayed action.

However, by taking proactive steps to manage risk, exploring strategic options, and potentially accepting a less
profitable path, Merrill Lynch might have avoided a complete collapse. The Bank of America acquisition
ultimately saved them from bankruptcy, but a different outcome might have been possible with a more risk-
averse approach.

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