Insiders Say Merrill Got Off Cheap


Although Merrill Lynch still faces civil lawsuits and a Securities and Exchange Commission probe for its role in the Orange County bankruptcy, Wall Street observers say Thursday’s criminal settlement removed the biggest cloud hanging over the brokerage giant.

“The last thing they wanted was a criminal trial,” analyst Charles M. Vincent of PNC Securities said, adding, “The civil stuff they can handle, but an indictment would have meant a bad image for a company that thrives on image.”

Within the municipal bond community, some competitors thought Merrill “got off easy,” in the words of one bond dealer who asked not to be identified.

There is evidence, however, that the firm’s troubles in Orange County and other missteps in Massachusetts and New Jersey have tarnished its reputation and cost it some customers in a fiercely competitive business.


From its lofty perch as the No. 1 muni-bond underwriter in 1994, Merrill has slipped steadily, to second place in 1995, third place last year and fifth place so far this year, according to Securities Data Corp.

Merrill Lynch shares dropped $1 to $61.625 Thursday on the New York Stock Exchange. It was a mixed day for brokerage stocks generally, though, and Merrill’s downturn did not necessarily mean investors viewed the settlement negatively, analysts said.

On the contrary, several experts regarded the settlement as a definite plus. One such Merrill watcher said the settlement “removes uncertainty, and investors hate uncertainty.”

For Merrill Lynch, which logged a record profit of $1.6 billion last year, municipal-bond underwriting is a small piece of a huge global business. Stock underwriting and retail brokerage, for example, are far more important to the company.


Still, Merrill--the nation’s largest securities firm--is used to dominating most of its lines of business, and its stumble from the top spot in muni bonds has been painful.

Besides Orange County, two other controversies have contributed to Merrill’s loss of market share in the $180-billion-a-year industry.

Last August, a federal jury in Boston convicted Mark S. Ferber of fraud and bribery and sentenced the former Lazard Freres & Co. partner to 33 months in prison and a $1.65-million fine.

The jury found that Ferber, while acting as financial advisor to the bond-issuing Massachusetts Water Resources Authority, illegally concealed the terms of a deal under which he was paid to help Merrill Lynch obtain muni-bond business.

And in New Jersey, Merrill was tarred by a federal investigation into questionable business deals between several of its employees and a securities firm half-owned by the former chief of staff of then-Gov. Jim Florio.

Merrill has denied wrongdoing in both cases, but the aroma of the “pay-for-play” allegations has stayed with the firm.

In pitching his services to bond issuers, a salesman for a rival firm said he never mentions Merrill’s troubles. “I don’t use that stuff,” he said, “but I don’t have to. Everybody’s aware of it.”

Not only has Merrill’s muni-bond ranking tumbled, but so has the dollar value of its underwritings. From handling $18 billion of deals (measured in amount of bond principal) in 1994, Merrill’s business slipped to $17 billion in 1995, $16 billion in 1996 and just over $6 billion so far this year, according to Securities Data Corp.


“They’re getting their nose bloodied a little bit, but this isn’t going to make a lot of difference to their bottom line,” another Wall Street analyst said. Municipal-bond underwriting is “just one more thing they do, and not a terribly important thing.”


Lower Bond Rating

Five years ago, Merrill Lynch was the nation’s No. 1 municipal bond underwriter. It has since fallen to fifth. Nationwide rank, principal amount in billions and number of issues:


1993: Rank 1 ($34.8)

1997**: Rank 5 ($6.1)



1993: 456

1997**: 133

* In billions

** Through June 19

Source: Securities Data Co.