Interview by Cullen Murphy ’74

Winthrop H. Smith Jr. ’71 gives an inside perspective on Merrill Lynch from its start in 1914 to its acquisition by Bank of America in 2008.

Ten years into the Great Depression two Amherst men, Charles E. Merrill ’08 and Winthrop H. Smith ’16, set out to teach the average American to invest in the stock market. This effort to “bring Wall Street to Main Street” revolutionized the financial world, made Merrill Lynch a household name and fostered capital growth after World War II.

In Catching Lightning in a Bottle, his comprehensive history of Merrill Lynch, Winthrop H. Smith Jr. ’71 provides an inside perspective on the firm from its start in 1914 to its acquisition by Bank of America in 2008. The author—son and namesake of a Merrill Lynch founder—is himself a 28-year veteran of the firm, and he knew all of its CEOs.
He left the company in 2002 over disagreements about its future direction.

“The book sheds vital light on two eras,” according to a review in The Economist: “the early years that saw the expansion of the firm and of populist finance, and on the bleak-post-millennial decade when its confidence and vision collapsed along with much of Wall Street’s reputation.”

Winthrop Smith Jr. ’71 with Vermont fall as backdrop

Cullen Murphy ’74, editor at large of Vanity Fair and chairman of the college’s board of trustees, interviewed Smith (above)—now the majority owner and president of Sugarbush Resort in Vermont—for the online book club Amherst Reads.

 Merrill Lynch, Pierce, Fenner & Smith is one of the most iconic names in the history of American business. Can you give a quick portrait of the first four of these people, leaving Smith aside for a moment?
Merrill Lynch began in 1914 as a single-person operation. The Amherst non-grad Charlie Merrill started the firm as a 29-year-old, and then he asked a friend he’d met at the YMCA, Eddie Lynch, to come into the partnership.  

The company grew through a series of acquisitions. One of the most important was in 1941, when they acquired a New Orleans firm, Fenner & Beane. In the 1930s, after Merrill had exited the business, my father and his other partners joined the Chicago firm of E.A. Pierce, and when they came back together in 1940 the Pierce name was added.

What had Merrill and Lynch been doing up to the point when they started the firm?
Charlie Merrill was a marvelous character. As a young man he was an entrepreneur and worked for his dad in Florida. He came to Wall Street because of a girlfriend and got a job through her father. He decided to strike out on his own and convinced Eddie Lynch to come on and be his partner. In many ways it was an odd-couple relationship. Charlie was a bon vivant, visionary, creative. Eddie Lynch was in many ways like the governor on a car. He was the check-and-balance. He would talk Charlie out of bad ideas and bring discipline. By the 1920s they had become millionaires at a very, very young age.

It sounds like one of those classic combinations. What about the fifth name, Smith, which you happen to have as well?
My dad graduated from Amherst in 1916 and set off to get a job in Boston, but he found the firms he interviewed with to be kind of snobby and arrogant, so he made his way to New York and started at another firm—for $7 a week as a runner—until an Amherst classmate said, “There’s this new firm, Merrill Lynch. You ought to go interview there.”

That began a 40-year friendship with Charlie Merrill, first his boss and mentor, then his friend and partner. My father became the managing partner in 1940. He effectively ran the firm for 21 years and was the person who convinced Merrill to come back into the business and start the modern Merrill Lynch, which brought Wall Street to Main Street.

What was the animating idea behind the company? How did that idea change over time?
Until 1929, Merrill Lynch was primarily an investment banking firm, underwriting securities, largely for the growing retail chain business. When the crash came in ’29, Merrill had deleveraged the firm, deleveraged his clients, so they didn’t get harmed on Black Tuesday the way so many people did. But he was not eager to stay in the securities business. He sold the firm to E.A. Pierce in Chicago.

In 1939 my dad—a partner at Pierce—was concerned the partnership was not going to be able to continue. He had an idea. He called Merrill and convinced him to take a look at a new business plan.

That plan was to bring Wall Street to the average American. At the time, most people weren’t invested in the market and didn’t know how to invest. The depression had gone on for nearly 10 years. There was war breaking out in Europe. It wasn’t the most obvious time to try a new business paradigm. But Merrill and my dad believed they could build trust back in investing.   

They started with the principle that the client’s interest had to come first. They did radical things: They took brokers off commission. They made research an independent arm from investment banking. They started the first training program. By allowing the average American to invest more than just in a savings account, they helped to foster capital growth after World War II.

Five principles defined the corporate culture of Merrill Lynch in what we might think of as its golden age. What was the thinking behind each?
The first is that the client’s interest has to come first. Second, Merrill and my dad recognized that this was a business of people. If you didn’t create trust and respect around your people, how were they going to serve the client’s interest? That culture got to be known as “Mother Merrill,” because the firm was like a family; we helped people in adversity and created a tremendous amount of loyalty. Third, they recognized that you couldn’t operate in silos. There was a greater whole.

Fourth, by bringing Wall Street to Main Street they were part of many communities, not just New York, Los Angeles and Chicago but also Williamsport, Pa.; Nashville, Tenn.; Burlington, Vt. They didn’t want to just take from the community. They encouraged resident managers to be on the school boards, the hospital boards, to give back philanthropically. The fifth, not least by any extreme, was integrity. Leaders would say, “If you can’t read it on the front page of The New York Times the next day, you don’t do it. You always tell the truth; you always act with integrity.”

You titled your book Catching Lightning in a Bottle. What do you mean to describe with that phrase?
One of our senior equity executives, Tom Joyce, wrote a letter to the organizers of a reunion we had a few years after I left Merrill. He wrote that our years at Merrill Lynch “were like catching lighting in a bottle.” When I started at the firm we were like the Mets: nobody respected us; we were just emerging as an investment banking firm. Over the next several decades we became arguably the preeminent private wealth investment banking and asset management firm in the world. We were proud to go home and say we worked for a great company that had a soul, as well as one that was extremely profitable and successful.

I’m tempted to take the Mets analogy further. Your book is, for much of its length, a very inspiring story, but as time goes on it becomes less inspiring. There’s a memorable portrait in the book of Stan O’Neal, Merrill’s CEO and board chairman from 2003 to 2007. You write, “I looked Stan O’Neal in the eye and saw no soul.” His period in charge was a turning point for you, and for the company.
In 2001 I had been asked by Stan, newly appointed as president, to stay on as vice chairman. It was very tempting to do: it was lucrative; it was prestigious. I’d hoped to stay there until I retired. But it became apparent to me that he didn’t respect our principles and that he was going to take the firm in a very different direction. In the middle of a sentence I said to him, “Stan, I’m sorry, I can’t work for you.” I stood up, shook his hand and walked out. That evening I had second thoughts. Had I acted impulsively? But I couldn’t be a part of a firm that was going to get rid of thousands and thousands of people, that was going to cost-cut extraordinarily, that was not going to respect the principles and culture.

I thought he was going to compromise the firm. I couldn’t believe that one person would so quickly almost bring it down. But he did. In 2001 he cut deeply into many of our core businesses. In order to recover the earnings he jumped into highly toxic trading instruments, subprime mortgages, CDOs. He took what was a healthy balance sheet and lowered it to a point where it was almost 36:1 leveraged. He created a silo mentality where people weren’t allowed to challenge one another—where if you challenged you got fired. That culture, in my view, was what brought the firm to its knees in 2007, to the point where Bank of America had to bail it out in 2008.

Winthrop Smith Jr. ’71 with Vermont fall as backdrop

The climactic moment in your book is the final Merrill Lynch shareholders’ meeting. You have a letter from the grandson of Charlie Merrill, and you’ve been invited to speak. What did you say, and how was it received?
This was Dec. 5, 2008, when Merrill shareholders voted on the acquisition by Bank of America. It was like a wake, a funeral. When I was called to speak, I read the letter from Merrill Magowan and then talked about what the firm had been, how we had grown, how proud we were to have been part of it. I reminded people that only in 2001 our stock had been at an all-time high, we had record earnings, record return on equity. I said: While I support the merger, this is a day that did not have to come.

I said that this day wasn’t the result of the subprime mess or synthetic CDOs. Those were the symptoms. This is the story of failed leadership and the failure of the board of directors to take action soon enough. I got tough on the directors; I said shame on them for allowing a CEO to consciously and openly disparage Mother Merrill, to throw out the founding principles, to tear out the soul of the company. Where’s the accountability? I said it’s no wonder that Main Street is learning to distrust Wall Street all over again. How could a board of directors allow a CEO who’d brought down a firm to walk away with a $160 million severance package?

I said there are many parallels today with what my dad and Merrill saw in the 1930s, and that Bank of America and Merrill have a great opportunity to once again rekindle the trust of Main Street. When I sat down the whole room stood in applause. The meeting was broadcast to Merrill offices around the world, to trading rooms in New York and London. I heard afterward that most people in those offices stood up in applause. It was one of the most gratifying moments of my life.

One can read your book as a parable of something much larger. Where has the industry gone wrong, and where does it need to go in order to go right?
In the 1990s companies’ trading areas became increasingly important and people who were trading for their proprietary book became a bigger part of the firms. Eventually most of the firms were run by traders, not by people who grew up on the client side of the business. There’s a change in the vocabulary: You heard them talking about counterparties instead of clients. Counterparties are adversaries; they are not clients.

That subtle change led to the excess we saw in 2007 and 2008, when all the firms were loaded up on subprime mortgages. They were overleveraging themselves. They were greedy. That led to problems we are still seeing today. Wall Street at the top is going to have to be more humble, is going to have to relate more to the average American. If we are going to restore the integrity in the capital markets that is so needed, the middle class has to believe they have a chance, not just the 1 percent.

Not long ago someone gave me a metal pin from the 50th reunion of the Amherst class of 1916. Your father was a member of that class. What do you know about your father’s experience at Amherst?
My dad passed away when I was young so I didn’t have many in-depth conversations with him, but I know he loved Amherst. His dad had gone there so he was almost preordained, especially since he had grown up in South Hadley Falls. But my dad wasn’t the most distinguished Amherst student. My mother told me he was probably a B student. He played hockey, managed the baseball team. I do know he was very popular. He became close friends with his classmate John J. McCloy, who served so many U.S. presidents.

And I know my dad loved going back to reunions. He became a trustee of Amherst, which was one of the highlights of his life. He endowed a chair, the Winthrop H. Smith Professorship of American History, because he believed so strongly in the value of a liberal arts education.

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Asia Kepka photos