Controversies Haven’t Hurt Merrill Lynch Bottom Line : Business: A year after the bankruptcy of longtime client Orange County, the brokerage has near-record profits. Skillful damage control plays a part.

This could have been the worst of times for Merrill Lynch & Co.

Its longtime client, Orange County, lost $1.7 billion in bad investments and pinned the blame on Merrill in a highly publicized lawsuit. Top executives were subpoenaed to appear before California lawmakers, who excoriated them even as federal regulators scrutinized the Wall Street giant’s financial dealings with the county treasurer.

With skillful damage control, however, Merrill has managed so far to shrug off the nation’s largest municipal bankruptcy and has rolled on to post some of the highest profits in its lengthy history.

To be sure, the firm worked hard to protect its reputation.

It hired a major California lobbying firm, flew out New York executives to hand-hold local customers, tapped veteran spin-control experts and compiled a 100-page booklet for clients called “Setting the Record Straight.”

Merrill’s bottom line has remained Teflon-coated:

* The company is expected to earn about $1 billion in 1995, more than any other brokerage firm and its third straight year of 10-figure net income. This year should be the second most profitable in Merrill’s history.

* Merrill hasn’t been blackballed in the halls of California local government. It is still the largest underwriter of municipal bonds in the state, with $3 billion sold this year. Aggressive, cut-rate pricing has been key.

* Merrill seemingly hasn’t lost a major municipal client in California since the bankruptcy, except for some directly connected with Orange County. Cities here, including one as important and lucrative as Anaheim, continue to use Merrill to sell securities. Local companies continue to pick Merrill to sell their stock on Wall Street.

* Merrill’s stock price has more than recovered from its initial drop, nearly doubling to $55.13 a share.

Stock market conditions helped, of course, as Merrill caught the same profit wave boosting most investment banking and securities firms this year. But Merrill is riding a little higher than the rest.

“The environment in 1995 has been very kind to Merrill Lynch,” said Haig Nargesian, a senior analyst at Moody’s Investors Service Inc. in New York. “The main concern was whether customers would shy away from them because of Orange County. That hasn’t happened.”

Even so, Merrill faces some serious threats. It paid half of a $24-million settlement in a highly publicized Massachusetts municipal bond scandal. New York last week suspended the firm from a key position in raising money for the city. Orange County is seeking $2 billion in a lawsuit against Merrill, and a judge Friday allowed the lawsuit to proceed, a setback for the firm.

Calvert D. Crary, a longtime litigation analyst, predicts Merrill will be held “responsible to some extent for the losses” and probably will pay a settlement in the $500-million to $1-billion range. Even that, according to one of his reports, could be done “without severe disruption of business” to Merrill.

As dismaying as Merrill’s prosperity may be to some, it provides some comfort to others.

“I’m pleased,” said William J. Popejoy, the county’s former chief executive, “because as a resident of Orange County I’d hate to think we were suing someone who didn’t have the ability to pay.”

With roots going back more than 100 years, Merrill is a global powerhouse, a one-stop shop of high finance. Earning one-fifth of its revenues overseas, Merrill has 44,000 employees in 31 countries.

Armed with its extensive network of retail brokers that serves both individuals and companies, Merrill is the largest custodian of individual assets in the world, holding $675 billion for its individual clients.

Merrill has remained the leading underwriter of corporate debt worldwide with an 18.2% market share during the first 11 months of this year, according to Securities Data Co., a research firm in New Jersey.

And in the year since Orange County’s Dec. 6 bankruptcy filing, Merrill has remained dominant in the sales and trading of bonds that finance America’s local governments.

One of its biggest clients was Orange County, where the firm underwrote major bond deals, lent the county money to leverage its investment pool and sold it many of the riskiest investments in its portfolio. The business was lucrative; in just 1993 and 1994, Merrill said, it earned $62.4 million in fees.

The once-sleepy and secretive municipal bond arena has posed the greatest troubles for Merrill this year, even beyond the borders of Orange County.

Merrill and Lazard Freres & Co. agreed in October to pay more than $24 million to settle civil charges that they defrauded four public agencies in Massachusetts. It was the largest settlement in the history of the bond market.

Because of the Massachusetts settlement, New York City said last week that it would limit Merrill’s role in its municipal underwritings, suspending the firm from its top-notch position until next summer.

Although Merrill earns only 5% of its revenue from municipal bonds--and competitors, such as Lazard, are dropping out because of the scandals--Merrill plans to stay in the market.

“As the largest custodian of consumer assets in the world this is an important service,” said Jerome P. Kenney, executive vice president of corporate strategy and research for Merrill. “There is no chance that Merrill would leave the municipal business.”

As a result, Merrill has fought hard to safeguard its California municipal turf. Not only have its officials spent hours addressing clients’ concerns, they’ve retained market share by underbidding competitors.

“They are becoming kind of the Wal-Mart of munis,” said one banker, who has competed with Merrill for business. “They always come in with the lowest bid.”

Although Merrill’s market share has slipped slightly from last year in deals where the underwriter has a more long-term role, and it probably has lost some clients, the dip has been hardly noticeable.

“We spent a lot of time with issuers in California,” said Kenney. “We were relatively unaffected. They accepted this as more of an isolated event than an indication of a systemic problem or anything about our service.”

Although Merrill has been excluded from Orange County’s recovery-oriented bond sales this year, the firm continues doing business here in other arenas.

On the corporate side, it helped sell shares for the Irvine Co.’s publicly traded apartment company. It also did a brisk business with individuals.

Herb Bennett, 38, a Merrill broker in Newport Beach, said he only lost two of his 200 local clients right after the bankruptcy, and one has come back.

“Sure, a few of my clients were concerned that Merrill was going to be sued, lose all its clients and go out of business,” said Bennett. “But I explained it to them.”

Even more surprisingly, at least one Orange County city--Anaheim, which entrusted $169 million to former Orange County Treasurer Robert L. Citron’s investment pool and is still short $17 million because of its collapse--continues using Merrill to trade securities for its own $350-million investment pool.

“At this point, we are just looking for the best pricing--that’s my responsibility,” said city Treasurer Charlene Jung, who has picked Merrill brokers at least five times this year because they offered the lowest bids.

Jon Schotz, financial adviser for cities, schools and others that placed money in the county’s investment fund, said it is “unbelievable” that any Orange County city would continue using Merrill even as they sue the firm.

Orange County’s new treasurer, John Moorlach, avoids Merrill completely.

“I would flip if Merrill showed up on our radar screen,” said Moorlach, who oversees the county’s nearly $2.6-billion portfolio.

California seems to suffer no such qualms, having selected Merrill as one of its preferred bond dealers. Of 120 applicants, all of which were asked to detail their involvement in Orange County, 67 firms were picked, including Merrill Lynch.

“It would have been presumptuous to overreact before all the facts were known,” said one state official, noting that Merrill has not been charged with any wrongdoing in Orange County.

A concerned Los Angeles Metropolitan Transportation Authority threw Merrill off its top-tier team of bond firms in the weeks after the bankruptcy, but restored Merrill’s status a month later.

“It was an immediate reaction to the bankruptcy,” said Les Porter, treasurer for the transit district. “They were concerned about the public policy implications. But we concluded that we were not in a position to judge those allegations.”

Immediately after the bankruptcy, Merrill hired major lobbying firm Nielsen Merksamer in San Francisco, which helped campaign against bills this year that might have cost Merrill bond business.

Merrill also prepared an extensive booklet called “Setting The Record Straight: Facts on the Orange County Bankruptcy,” which was distributed to employees and clients.

When word got out that UC Irvine professor Philippe Jorion was writing a book on the Orange County bankruptcy titled “Big Bets Gone Bad,” he got an unsolicited call from Merrill spokesman Tim Gilles offering help.

“They have been very good at damage control,” said Jorion. “In a way I wish the county was better. Their public relations has been very bad.”

Bruce Bennett, the county’s lawyer, notes that Merrill has had a representative at every county Board of Supervisors meeting since the bankruptcy and a lawyer present every time he speaks.

“Merrill has devoted substantial resources in terms of both people and dollars to protect its image,” said Bennett. “The county hasn’t been interested in that. We are fighting them in court.”

Just how much Merrill is spending to protect its image and to fight the county’s lawsuit isn’t clear. For the latest quarter, Merrill said its legal and professional fees rose 28% from last year to $114 million, but the company won’t divulge how much of its added fees are due to Orange County.

“The scandals have hurt them somewhat, but it’s difficult to quantify how much,” said Perrin Long, analyst with Brown Brothers Harriman & Co. in New York.

So far, most of the Merrill bankers involved in the Orange County fiasco are still doing business in California.

Merrill salesman Michael Stamenson, who spoke daily with Citron, is still an employee “in good standing,” a spokesman said. Stamenson, involved in financial debacles in Orange County and earlier in San Jose, is assisting investors from his San Francisco office.

Merrill continues to do bond business with its old partners on Orange County deals. The firm recently teamed up with Jeffrey Leifer, another longtime adviser to Orange County who is now under investigation for his activities.

Before the bankruptcy, Merrill and Leifer worked together in July, 1994, on issuing a controversial $600-million note for Orange County, which was sold so that Citron could further his bets on interest rates.

The note has since defaulted, and is at the heart of allegations that the county and its financial consultants failed to make legally required disclosures to prospective investors.

This year, Merrill and Leifer cooperated on a $64-million deal for Sonoma County, where Merrill has been on the list of favored firms for the past 15 years.

“Even though we knew about everything going on and read about it in the papers, we’ve never had a problem with them,” said Sonoma County Treasurer Don Merz, who helped lead an inquiry into Orange County’s fiasco for the National Assn. of Counties.

Because of its size and presence in California, he noted, Merrill “cannot be ignored.”