As a stark counterpoint to How Goldman Sachs Bagged Clients, I recall ever so fondly how Merrill Lynch bagged itself:  With a Sept. 2006, top-of-the-market, $1.3 billion acquisition of sub-prime originator First Franklin from National City:

First Franklin is one of the nation’s leading originators of non-prime residential mortgage loans through a wholesale network.  [...]

“This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services.” — Dow Kim, president of Merrill Lynch’s Global Markets & Investment Banking Group

A close friend who was in the employ of seller National City told me at the time that they couldn’t believe their good fortune at having found a buyer for their turd factory.  (National City itself was eventually picked up on the cheap by PNC.)

The operation was being wound down about one year later, representing what might be one of the all-time boneheaded acquisitions in corporate history.

The saddest part of all is that Merrill had a chief economist — David Rosenberg — who was screaming about an inflating housing market bubble [PDF].  Had they listened to their own economist — not an unreasonable thing to do — Merrill could have come out smelling like a rose.  Instead, they chose to ignore Rosie and plough headlong into what would have undoubtedly been bankruptcy if not for B of A.

Good times!

Category: Bailouts, M&A

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “As Goldman Bagged Clients, Merrill Bagged Itself”

  1. globaleyes says:

    As BR makes clear: history unravels right before my eyes. I was there (gulp).

  2. Pat G. says:

    Then, GS bagged a few more representatives for good measure who in turn bagged the U.S. taxpayer to pay for it all. Is this a great country or what?? lol

  3. troubled times says:

    Everyone using that exact same technique…MER, Goldman, Reagan, Kennedy, Lenin , Ceaser, Jesus, Ali, Budda….all use the same technigue ” follow me, accept my word and i will show you never ending happiness and joy ” …..Imagine what half of those people would do if you were a short seller ?

  4. troubled times says:

    I bank with BoA and i swear some of that turd ends up on my sneaker everytime i go in there. In fact when i leave the place i almost fell good i’m broke. With that said, i was called back to work. I start up again in two weeks. I wonder how long it will last ?

  5. mysterious eggs says:

    “Best and brightest”, oh misnomer of epic proportions. *smacks forehead*

  6. budhak0n says:

    And the “best and brightest” like me supported B0A, oh well what do they call it in the Lion King?

    The Circle of Life. You couldn’t let the Bull itself take a dirt nap.

    Alter. Adapt. Evolve. You move on.

  7. the “Stumbling Herd” was Looted–Lock, Stock, Frock & Barrel–EOS.

    Rosie wasn’t listened to b/c his, correct, POV was not a piece with the design to lead that Animal to the abbatoir (to, you know, mix metaphors)..

    Stan O’Neil’s pay package? for the *results under his management?

    budakhon, He was underpaid, right?

    he was a Cheap Trick, no?

    (h/t MRegan)

  8. budhak0n says:

    E Hoff. I’m all with you my friend. The stuff some of you are just coming on board with here.

    This is stuff I was screaming from the Rooftops in 1997. So sorry. Life , 13 years and two kids can do that to a guy.

    You are not going to find a person on this planet who does not agree more that the condition of Us corporations is that they are populated with Yes men , and people at the top who have no interest in the underlying business, only whatever salary they can derive.

    I was banging the drums of pay for performance over 10 years ago. And they almost bankrupted me for it and are still pursuing me when I’m not looking.

    The truth is nobody cares. In the end, if you stand by yourself and sing the truth, your head will just wind up on the blocks or you’ll be poor and some footnote in some retelling of the tale.

    Better to be meek, and make as much as possible than waste time trying to capture a paper dragon.

    If the people who work for the government and derive an actual salary don’t want to do it, why in the world would any of us want to do it for free?

    You can’t get the money back and corporate structures aren’t going away. You might be able to keep them from laughing so heartily at you but the truth is they think they are pretty neat, even if the rest of the country hates their guts.

  9. Assassin says:

    On the other hand, National City did keep some of First Franklin’s junky loans. And around the same time (late 2006), they were acquiring Fidelity Bankshares (aka Fidelity Federal Savings Bank of Florida – symbol FFFL) and Harbor Florida Bancshares.

  10. Mezrich says:

    Barclays Capital had the same kind of great idea…

    Barclays Bank PLC (“Barclays”) announces that it has entered into an agreement to purchase EquiFirst Corporation, the non-prime mortgage origination business of Regions Financial Corporation (“Regions”), for a consideration of approximately US$225 million (£115 million). Completion is expected in the first half of 2007, subject to the receipt of the required licences and applicable regulatory approval. In the third year of ownership, Barclays expects to achieve an annual post-tax return on this investment in excess of 20%. Barclays will finance the transaction out of existing cash resources.

    EquiFirst is the 12th largest non-prime wholesale mortgage originator in the United States. It originates its loans through over 9,000 brokers in 47 states. It will be combined with Barclays mortgage servicing and capital markets capabilities to create a vertically integrated mortgage franchise. Barclays believes that a vertically integrated mortgage franchise can deliver significant synergies through linking our established capital markets business with servicing and origination capabilities.

    I remember friends working there telling me how Bob Diamond and Grant Kvalheim were thrilled about the idea !!! My roomate working there at the time told me about it. An he goes on and on about how Bob Diamond in its presentation was saying this a great adventure…bla bla bla bullshit as usual !!! My roomate was completely dumbfounded as we had found during a preceding week-end an interesting website that had just opened : “The Mortgage lender implode – o – meter” :

    So anyway, if you look at the press release, you can see for yourself the expression of joy coming from the co-president at the time

    “Grant Kvalheim, Co-President of Barclays Capital, commented, “I am delighted to acquire such a strong management team within EquiFirst and we welcome the EquiFirst staff to Barclays Capital. This acquisition offers Barclays Capital an excellent opportunity to further vertically integrate and expand our existing US mortgage business.””

    In the end, Barclays finalised the acquisition in april for only US $76 millions. In august, they were laying off 400 people and closing branches…until it finally shutdown completely :

    “For the third and perhaps final time, Equifirst Corporation rises to the top of the list as most recently imploded. Retail and wholesale operations are being permanently shut down per an announcement emailed to brokers:

    “Effective immediately, EquiFirst Corporation is ceasing its lending operations and will no longer accept mortgage loan applications for any type of mortgage loan product.”
    There reportedly was a company-wide conference call from CEO Jeff Tennyson at 9:00 AM EST. One tipster indicated parent Barclays Group had actually “pulled the plug” last week, and said, “Employees were just notified today.” The source guessed about 100 employees were left in the Charlotte, NC headquarters.”

    It did not cost as much to Barclays Capital as it did Merrill but it did cost its job to Grant Kvalheim (that among other stuff !!!)

  11. b_thunder says:

    “Had they listened to their own economist — not an unreasonable thing to do — Merrill could have come out smelling like a rose” – ok, the firm didn’t. But the executives, the i-bankers and the mortgage bankers sure as heck came out of this with millions in their pockets

  12. Cynic_FA says:

    b_thunder got it right. The article says the saddest thing is… Well the saddest thing really is that the bastard Stan O’Neil who orchestrated the mess got paid $200 million to walk away before the public new what a mess he made. And then the top execs and top bankers/traders paid out $3 billion in the midnight raid before the merger with BAC closed.

    The banks all say that outrageous comp is needed to keep the talent. Well Merrill paid out $3 billion with no intention of sticking around. These guys did not have a five year vesting or a clawback. Just pay me and waive goodbye. And Geithner blessed the whole sham.

    The other extreme would be the 15,000 financial advisors and thousands of other mid level executives who watched HUGE amounts of paper profits disapear as MER tanked. Almost like Madoff, Merrill was all a fiction of profits so the paper losses in Merrill stock never really happenned. Now I feel better, I didn’t lose all that money in MER because the profits were all a fiction.

  13. budhakon,

    this: “If the people who work for the government and derive an actual salary don’t want to do it, why in the world would any of us want to do it for free?” is, probably, the easiest, of your Q:s, points, to answer..

    “Sic semper tyrannis” is a Latin phrase meaning “thus always to tyrants”.
    1774 July. “The God who gave us life, gave us liberty at the same time.” (A Summary View of the Rights of British America, B.1.135)

    1775 June 26-July 6. “Our attachment to no nation upon earth should supplant our attachment to liberty.” (Declaration of the Causes and Necessity for Taking Up Arms, B.1.215)

    1776 July 4. “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.” (Declaration of Independence, B.1.429)

    1787 Nov. 13. “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is it’s natural manure.” (to W. S. Smith, B.12.356)

    1791 Dec. 23. “I would rather be exposed to the inconveniencies attending too much liberty than to those attending too small a degree of it.” (to Archibald Stuart, B.22.436)

    1811 Mar. 28. “The last hope of human liberty in this world rests on us. We ought, for so dear a state to sacrifice every attachment and every enmity.” (to William Duane, Ford 11:193)
    now, of course, if this: “The truth is nobody cares.”, is, in Fact, the Case at hand, it proposes a different conumdrum.

    One, of which, I do not think this: “Better to be meek..”, well, answers..

    this: “but the truth is they think they are pretty neat”, is, certainly, the case, and, from a fashion, they’re justified. But, they would do well to be, at least, somewhat, circumspect. They should realize that their *Wealth is, largely, claims upon future productivity, and, simply, we all know that the Goose, deade, lays not..

    it’s a curious Path that We must choose, though, to me, Good Patrick taught us all the Political Triangulation we need to know.

  14. rktbrkr says:

    Barry, Could you post a chart showing how these cheesey mortgage writing boiler room operations were rolled up into bigger and bigger banks until they got to the point where they almost took down western civilization, Golden West into Wachovia into Wells Fargo. WaMu into Chase,Countrywide into BOA (boy they couldn’t get enough of this shit).

    Funny, ML was the 500 pound gorilla with brokerage accounts, they were a franchise but they wanted to be something they weren’t – chasing easier money. Similar with GM ->GMAC->Ditech.

    Easy money usually turns out very badly.

  15. philipat says:

    Merrill: The Musical.

    Set in an Office with a French antique pissoir.

    Has to be a hit both sides of the pond.

  16. Clem Stone says:

    (from Merrill Lynch) “This transaction accelerates our vertical integration….”

    (from Wikipedia) Vertical: the direction aligned with the direction of the force of gravity.

    So really they laid out the truth for all to see, but most people misinterpreted it.

  17. [...] As Goldman bagged clients, Merrill bagged itself – This quick read is on the acquisition by Merrill Lynch of First Franklin Financial which may not seem to have any connection to what I usually highlight here.  The connection is that First Franklin Financial was a subsidiary of National City Bank that specialized in subprime mortgages.  What I found interesting was that I recall thinking when National City sold First Franklin that it was such a smart move.  And it was.  But it still didn’t save National City. [...]