Not until the darkest hours of the 2008 financial crisis did Merrill Lynch’s thundering herd finally stampede off a cliff. On the calamitous September weekend that saw the collapse of Lehman Brothers, government regulators talked Bank of America into buying a debt-saddled Merrill for a fire-sale price of $50 billion.
It was an inglorious end to a 94-year-old banking empire, which in its finest moments sought to democratize the financial-services industry and make Wall Street more accessible to Main Street.
But in the view of Winthrop H. Smith Jr., the seeds of Merrill’s collapse were sown in August 2001 long before the sale. That’s when a dictatorial new company president, E. Stanley O’Neal, began replacing the firm’s old guard with inexperienced loyalists and dispensing with the company’s client-focused traditions, which had long been enshrined in a vaunted list of “the Principles.”
Smith, a 28-year veteran of Merrill Lynch who now lives in Warren and owns Sugarbush Resort, was among the casualties of O’Neal’s 2001 purge. And in a new, self-published book, Catching Lightning in a Bottle: How Merrill Lynch Revolutionized the Financial World, Smith blames Merrill’s downfall on O’Neal’s abandonment of the company’s culture in favor of profitable but perilous derivatives.
“My feeling was that the firm would at least be marginalized,” Smith said last week in the cafeteria of Sugarbush’s Gate House Lodge after taking a bitterly cold run on the mountain he owns. “I never thought it could be brought down, but I knew it was going to be marginalized.”
To the skeptic, Smith’s tale might appear a smidge self-serving. As the son of one of the firm’s early leaders, he had long been groomed to take over the institution. But in July 2001, the company’s board of directors passed over Smith and two other candidates to name O’Neal president, setting him up to become the company’s next chief executive officer.
Two months later, when the new boss took away Smith’s positions heading Merrill’s foreign arm and its international private client group, the former heir apparent declined a largely ceremonial position and quit the firm. Within a few years of his departure, Smith had sold every stock he owned in the company his father cofounded.
As it turns out, Smith was on the right side of history. His indictment of O’Neal, largely ignored during Merrill’s turbocharged and highly profitable years of 2005 and 2006, now seems prescient. That O’Neal is widely regarded these days as the villain of the Merrill saga, Smith said, made Catching Lightning easier to pen.
“It would have been [difficult to write] probably eight years ago. It isn’t now,” he said. “It isn’t now because so much has been written about [O’Neal]. I didn’t have to break the news. I didn’t have to sound like sour grapes. I could, you know, put a little color on it, but everybody knows what he did.”
Smith’s tome isn’t entirely about Merrill’s final years — or even about the three decades he spent at the firm. Smith chronicles, in great detail, Merrill’s rise from a scrappy little brokerage house to a world financial power. And he centers his story on the 12 men who led the firm, from the visionary Charlie Merrill to his own, understated father, Winthrop H. Smith Sr.; to John Thain, the Goldman Sachs alum who presided over Merrill’s sale to Bank of America.
Smith knew every one of these men. He grew up in the shadow of what its employees referred to as “Mother Merrill,” and his corporate history reads more like a family saga. The chairmen and CEOs variously come across as a revered grandfather, a respected father, a batty uncle or a ne’er-do-well cousin.
Thanks to the collaboration of co-author and Pulitzer Prize-winning journalist William Ecenbarger, Catching Lightning is imbued with meticulous research. Back in 1999, Merrill’s communications department hired Ecenbarger to write a history of the company, and he put in years of combing through the archives. But O’Neal canceled the project in 2003.
Six years later, after Ecenbarger saw a video of Smith delivering a powerful eulogy for the firm at its final shareholders meeting, the writer reached out to the former executive to propose a joint project.
“It was pretty obvious to me that, one, he had a great affection for the company, and, two, he felt it had been seriously damaged by O’Neal. So I gave him a call,” Ecenbarger said in a phone interview. “I said, ‘I think we really ought to do this because I’ve got all this material, all this background information.’”
For three and a half years, the two drafted chapters and sent them back and forth, editing each other’s work.
“He’s not a writer; he’s a businessman. But as a writer, he’s pretty good,” Ecenbarger said of Smith. “He’s a better writer than I am a businessman.”
While Ecenbarger focused on the company’s earlier history, Smith drafted the later chapters chronicling the era in which he played a role. Perhaps as a result of that process, Catching Lightning can feel like two different books. And it drags in places, detailing yet another boardroom meeting, corporate jet ride or unexpected promotion of a junior executive.
But fantastic little kernels of knowledge that only Smith could deliver enliven Catching Lightning.
When the elder Smith retired in 1957, his partners renamed the company in his honor, calling it Merrill Lynch, Pierce, Fenner & Smith. After a wave of publicity about the name change, the younger Smith’s Upper East Side school in Manhattan received a suspicious phone call, he writes:
“Mr. Smith has been in a serious car accident and Mrs. Smith is rushing to the hospital,” the caller said. “Would you get their son ready? We will pick him up shortly.” The school was only two blocks from our apartment. They immediately called home and my mother answered the phone. “Oh, my God, keep Winnie there,” she told them. “I’ll be right over. This is a kidnapping attempt.”
After that, the 8-year-old Win Smith was escorted to school each day by private detectives.
At its core, Catching Lightning is a love story about an investment bank, which you wouldn’t expect to have much resonance in a post-Occupy Wall Street world.
But it works. It works because that love story is really rather affecting. In 1961, when Smith was just 11 years old, his father died of Parkinson’s disease.
“I wish I’d gotten to have him longer than that,” he writes. “I think about him every day.”
It wasn’t until the younger Smith graduated from business school and, after much hesitation, took a job at Merrill that he came to know his father through the stories of his new colleagues. The firm, in a way, became a surrogate father.
So when O’Neal came to power in 2001 and pushed Smith to the exit, it was as if the latter were being banished from his own family — before he could realize his dream of becoming its patriarch.
After word leaked to the press of his demotion from the top of Merrill’s international private client group, Smith writes, he summoned his team members to a conference room to inform them of the news.
“Someone once said you can never love a firm because it can’t love you back,” he told the crowd. “Well, that person never knew Merrill Lynch.”
Even then, before the credit default swap years, Merrill Lynch had long since outgrown its role as the middlebrow brokerage house that radically transformed the banking business in the mid-20th century.
It was Merrill, led at the time by the elder Smith, that first understood how much money could be made by looking beyond the 1 percent and the coastal elite. Unlike Goldman Sachs and J.P. Morgan, Merrill built branch offices in Middle America, prevented its brokers from charging commissions and aimed its ingenious advertising campaigns at a middle class that had never dreamed of investing in the stock market.
Remarkably, its leaders convinced America to trust Wall Street.
Sixty years later, that trust is gone — in no small part because of Merrill’s own mistakes. And that clearly pains Smith.
“It’s sad, because 98 or 99 percent of the people on Wall Street are really good people trying to do the right things,” he said. “But to see how some people on Wall Street behaved and brought [the financial crisis] about is really upsetting. I wish the leaders on Wall Street got it a little bit better. I wish they could relate to the average person and they weren’t as arrogant and as greedy. The firms need to be taken over by a different set of characters, in my opinion.”
Sadly missing from Catching Lightning is Smith’s most fascinating story: how he morphed from a New York City banker to a Vermont ski-slope owner.
Not long before his ouster from Merrill, Smith had teamed up with a pair of Mad River Valley residents to buy the mountain from the American Skiing Company, which had run it into the ground. The sale closed on September 10, 2001, the day before 9,000 of Merrill’s New York City-based employees were forced to evacuate their headquarters when terrorists drove planes into the adjacent World Trade Center.
Smith had initially planned to be an absentee owner of Sugarbush, but a few years after he left Merrill, he decided to take charge.
“I realized this is not an investment where you’re just passive,” he said. “I decided I really wanted to put my own imprint on it. That’s when I decided to move here full time and make this a second career.”
In a way, he was living up to the prediction of Donald Regan, the former secretary of the treasury and Merrill CEO who told Smith when the latter left the firm, “I sure as hell hope you’re not going to disappear and become a hermit in Vermont.”
An average day for Smith is spent on the mountain and he manages to ski more than 100 days a year. But most of the time, he’s working to improve the business, which he said has turned a profit in recent years. With the help of foreign investment through the federal EB-5 program, he has expanded the resort’s base area and built new lodges and condos.
Crucial to his success in Warren, Smith said, are the lessons he learned from his last job.
“I basically took the Merrill Lynch principles that I believed in and brought them here,” he said. “That starts with: Your clients’ interests come first. Your guests’ interests come first. That’s important. You think about how you act. Are you doing it to make money, or are you doing it to provide a good service that, in turn, will make money?”
Given his continuing affection for the firm, would Smith ever leave Warren to return to Mother Merrill?
Four and a half years ago, he tried.
In the summer of 2009, not quite a year after Bank of America took over their old company, Smith and two other former executives traveled to Charlottesville to see whether its new owner might be willing to sell it back to them.
“We had a brief discussion, but there was no interest,” Smith said.
Nowadays, that dream is gone.
“You know the old phrase ‘You can never go home again’? I’d do those 28 years all over again, but now that I’ve left, I’ve moved on,” Smith said. “Now that I really love this as a second career, I wouldn’t want to do that again.”
"Catching Lightning in a Bottle: How Merrill Lynch Revolutionized the Financial World" by Winthrop H. Smith Jr. with William Ecenbarger, 609 pages. $29.95 hardcover, $19.95 paperback.
The original print version of this article was headlined "Lightning Strikes"
[Newly appointed Merrill Lynch president E. Stanley O’Neal] was never big on small talk, so just as I was settling into my chair he said: “I hope that you’re here to accept the job. I want you to be a core part of my team. We are going to have to change a lot of things about the way this place is being run. As soon as we get rid of Komansky, we can get started running this place the right way.” Wow! I stared at him in disbelief. Here was the new president talking about discarding his nominal superior, David H. Komansky, the chairman and chief executive officer.
O’Neal launched into a scathing attack against “Mother Merrill” — he said the words the way a sick man names his disease — and he ridiculed the Principles and the culture that had made the company revered by both its customers and its employees. As he ranted on, I grew angrier and felt my cheeks quavering and the veins throbbing in my own neck. Clearly this man cared nothing about our heritage or our prestige in the business world. Finally, I interrupted him. I had heard enough. “Stan,” I said, “thank you for your offer but I can’t work for you.” I stood up and walked out, to the silent amazement of O’Neal.