Some See Merrill Deal as Routine Business Cost

In the view of some on Wall Street, Merrill Lynch’s $400-million legal settlement with Orange County on Tuesday was less a black eye than a straightforward cost of doing business.

“No matter how strong your case is, there’s always a chance of losing,” said analyst Steven Eisman, who follows the brokerage industry for CIBC Oppenheimer & Co.

Despite its dogged insistence that it did nothing wrong and would never settle, Merrill did the math and finally calculated that $400 million was a reasonable price for insurance against a potential verdict of more than $1 billion from a Los Angeles jury, Eisman said.

Also weighing in favor of a settlement, experts said, was Merrill’s desire to continue doing municipal bond business in Orange County and the rest of California. A drawn-out and contentious trial could make that more difficult.

One of the county’s allegations against Merrill was that it had failed to properly disclose the risks of the securities in which former County Treasurer Robert Citron was investing. The county declared bankruptcy in 1994, suffering investment losses of $1.6 billion.

Merrill’s big settlement could make other brokerages more cautious in their municipal bond business, said Schroder Wertheim analyst James P. Hanbury.

He said he expects brokerages to err on the side of more disclosure. “People will say, ‘If it happened to Merrill, it could happen to anybody,’ ” he added.

Investors apparently were not troubled by the settlement, as Merrill’s stock closed at $89.06, up 31 cents, in trading on the New York Stock Exchange.

The firm said it had set aside reserves for the settlement, and the payment “will have no financial impact” on earnings either this quarter or later. Merrill Lynch reported profit of more than $1.9 billion last year on revenue of nearly $32 billion.

Had the lead underwriter been a local securities firm instead of a global giant, chances are the legal settlement would have been far smaller, said Richard Lehmann, president of the Bond Investors Assn. in Miami Lakes, Fla.

“This is one of the burdens you carry when your name is Merrill Lynch,” he said.

On the other hand, he said, the size of the settlement also indicates that Merrill must have felt vulnerable to a negative verdict.

True, Merrill neither admitted nor denied wrongdoing, but “$400 million admits a hell of a lot,” Lehmann said.

Eisman, the CIBC Oppenheimer analyst, said he thought the case will ultimately damage Merrill’s reputation “not one iota.”

“People who are in the business look at it like this: Citron was a big boy,” Eisman said. “He rolled the dice and he lost.”

* BANKRUPTCY ACCORD: Merrill Lynch will pay $400 million to Orange County. A1