Catching Lightning in a Bottle: How Merrill Lynch Revolutionized the Financial World

Prologue

I went into the meeting with every intention of saying yes. But the answer to my own seemingly simple question changed all that, and I knew in an instant that my life would never be the same. What I could not have imagined was how quickly Mother Merrill would metamorphose into something I would not even recognize.

It was October 2001, just a few weeks after the terrorist attacks on the World Trade Center. Merrill Lynch had been forced out of its offices in the neighboring World Financial Center. The new president and eventual CEO, E. Stanley O’Neal, was temporarily using our office at 717 Fifth Avenue in Midtown Manhattan. A few days before, as part of his broad reorganization, O’Neal had removed me from my twin positions as chairman of Merrill Lynch International and president of the International Private Client Group. He had asked me to stay on as vice chairman of Merrill Lynch & Co. to focus on our most important client relationships throughout the world. I was initially skeptical. I had become increasingly concerned about O’Neal’s vision for Merrill Lynch, about how he was starting to shape his administration, and about his shabby treatment of some of my fellow executives. However, conversations with several ML colleagues whose judgment I respected convinced me to give the new role a try. We scheduled another meeting.

Stan was never big on small talk, so just as I was settling into my chair he said: I hope that you’re here to accept the job. I want you to be a core part of my team. We are going to have to change a lot of things about the way this place is being run. As soon as we get rid of Komansky, we can get started running this place the right way. Wow! I stared at him in disbelief. Here was the new president talking about discarding his nominal superior, David H. Komansky, the chairman and chief executive officer. O’Neal rambled on until I asked him where he stood on the Principles.

The Principles were our mantra at Merrill Lynch. Charlie Merrill and my father had built the firm on a core set of values, and through the years they had been carried forward by their successors. Every chairman and CEO up to O’Neal had always felt and acted as though they stood on the shoulders of the leaders who had preceded them. Dan Tully, Komansky’s predecessor, capsulized these Principles and now they were displayed prominently in every Merrill Lynch office throughout the world. In our foreign offices, they were written in the local language. And they were etched in the concrete of our headquarters in New York:

CLIENT FOCUS

RESPECT FOR THE INDIVIDUAL

TEAMWORK

RESPONSIBLE CITIZENSHIP

INTEGRITY

Tully revered them and always referenced the Principles whenever we had to make difficult decisions. Okay, he would ask in a weekly Executive Committee meeting, is this really in the client’s best interests? But when I asked O’Neal about them, his face distorted with anger and I could see the arteries throbbing in his neck.

O’Neal launched into a scathing attack against Mother Merrill—he said the words the way a sick man names his disease—and he ridiculed the Principles and the culture that had made the company revered by both its customers and its employees. As he ranted on, I grew angrier and felt my cheeks quivering and the veins throbbing in my own neck. Clearly this man cared nothing about our heritage or our prestige in the business world. Finally, I interrupted him. I had heard enough. Stan, I said, thank you for your offer but I can’t work for you. I stood up and walked out, to the silent amazement of O’Neal.

Back home in Connecticut that night, doubts began to fester as I tried to fall asleep. Had I acted impulsively rather than rationally? Was it the wrong decision—a huge mistake? Abruptly leaving a firm where my father had worked for forty-five years, finishing at the very top, and a place where I had been for twenty-eight years was not an easy decision. I knew that I would be disappointing many colleagues as well as my family. And I understood that I would be giving up many millions in future compensation.

But the next morning I awoke refreshed, with a sense of relief. I knew I had made the right decision. I looked out the window at a glorious autumn day. Every leaf looked like a flower. I got into my car and began driving north—first on Interstate 95, then on Interstate 91. As I passed the exit for Holyoke, Massachusetts, I thought about my father, who had been born and raised only a few miles from there in South Hadley Falls. Also nearby was Amherst College, where both Charlie Merrill and my father had studied and from which I graduated in 1971.

At that moment I was sure that my father would have been proud of my decision because it was based on principle—his Principles. The Merrill Lynch culture that I loved and respected was going to change dramatically, and I could not be a party to it. I could not be a member of this new management team.

While I was driving, I suddenly thought of the matryoshka, the Russian nesting dolls, in Dave Komansky’s office. Dave had been presented with these as a gift when he succeeded Dan Tully as CEO in 1997. There were ten dolls, each with the face of a Merrill Lynch leader, beginning with Charlie Merrill. Next came my father. Then Mike McCarthy, George Leness, Jim Thompson, Don Regan, Roger Birk, Bill Schreyer, Dan Tully, and Dave Komansky. The dolls got progressively larger from Merrill up. The symbolism of the dolls was that each era of Merrill Lynch grew from what was inherited from the prior one and that each new leader built on the success of his predecessor rather than relied on what he could achieve alone. Each of us stood on the shoulders of those who came before us, those who built our successful firm and created a powerful and enduring culture. It was our responsibility to maintain the essence of what came before us while moving into the future. It was our obligation to adopt change without throwing out the Principles that were our solid foundation. It was our obligation to preserve the culture.

By the time I crossed the border into Vermont that day, I could really see that autumn had taken a firm grip on the landscape. The change is dramatic because Vermont has outlawed billboards and all you see is the vista. I drove past trees in gorgeous Van Gogh colors, past farmland that had been harvested to stubble. My destination was Sugarbush, a ski resort that I and a few other investors had purchased on September 10, the day before the terrorist attacks.

One nagging thought refused to go away, however, and it clung to my brain like a barnacle on a hull. Stanley O’Neal was dead wrong when he characterized my company—my former company—as inefficient, paternalistic, and bloated. On the contrary, Merrill had become one of the leading investment banking and private wealth firms in the world. We had a global footprint that was unmatched and envied by our competition. We were proud to wear the Bull on our sleeves and in our hearts, and we felt privileged to be a member of Mother Merrill’s family. The bloated firm that O’Neal was about to disassemble had earned a record $3.8 billion the prior year, had a pre-tax margin of 21.3 percent, and had a return-on-equity of 24.2 percent. For the forty-eighth consecutive quarter we had led the Global Underwriting league tables with a 13.3 percent market share, and we ranked No. 3 in global mergers and acquisitions, with very little difference between us and No. 1. Our global research was ranked No. 1 in the world, and we were the dominant secondary equity trading firm in the world. Our private wealth business held $1.5 trillion in client assets and our global asset management business managed $557 billion. We had 72,000 employees, 21,200 financial advisers, and 975 offices in forty-four countries around the world. In the first quarter of 2001, our stock price hit a record high of $80.

However, O’Neal had no interest in continuing the culture that had allowed our firm to prosper. In my opinion he was enabled by a Board of Directors who valued their positions and compensation as directors more than they valued a culture that required integrity and respect. They allowed short-term profitability to blind their views of the highly leveraged and risky business Merrill would become, and they allowed a small group of greedy individuals to destroy an icon. What happened from 2001 through 2007 never should have been allowed to occur.

The real story of Merrill Lynch had to be written. There was a reason why Arthur Levitt, the former chairman of the Securities and Exchange Commission under President Clinton, called Merrill Lynch the only firm on Wall Street with a soul. This is mostly a positive story about a firm that grew into greatness through principled leadership and a core set of values that shaped its culture and brought Wall Street to Main Street after World War II. Through innovation and principled leadership, it became one of the world’s leading and most venerated financial firms. For the hundreds of thousands of us who knew the real Mother Merrill, our experience there was like catching lightning in a bottle. Unfortunately, the years after 2001 were not the same.

I sat down in the spring of 2010 to begin writing this book. Link by link, I retraced the glorious history of this company. It was a story I knew well. In considering where to begin, I finally settled on a scorching afternoon ninety-four years earlier in the dusty, sleepy town of Shaw, Mississippi.

Part One

A young and charismatic Charlie Merrill begins to charm Wall Street.

Chapter One

Little Doc

(1885–1907)

The wooden sidewalks on either side of the single dirt street were perfectly still, without any moving thing. The town’s commerce was conducted in false-fronted shacks, but all of the respectable enterprises—a drugstore, two hotels, and several cafés—were closed. On one side of town, there were nine churches—four white and five black. On the other side, on the banks of Porter’s Bayou, there were at least that many brothels and saloons. But even they weren’t open for business today.

It was August 1907, and all across small-town America, in each of the other forty-four states, it was the same as here in Mississippi. Everyone was just outside of town, at the ball park. Nearly every town in America had its own ball park and its own ball team, and both were sources of considerable civic pride. The smaller the community, the greater the pride. Challenges were issued to neighboring towns, and the games became festive occasions with bands and cookouts. Special trains brought in the out-of-town fans, though visiting teams were at a disadvantage because the home team supplied the umpires. Nevertheless, the betting was heavy.

Baseball really was the national pastime, and in Shaw, this really was the only game in town. No one missed it. It would be years before radio broadcasts of major-league games began eroding attendance. Typically, the games were played on rock-studded vacant lots and in cow pastures where sometimes dried fecal matter served as bases. Shaw’s ball park was an old cotton field that had been dragged more or less smooth with a huge steel rail. The backstop was fashioned from weathered, discarded lumber and chicken wire. The bases were burlap bags filled with sand. The field was surrounded by horse-drawn wagons and buggies, and fans watched attentively from chairs and spread-out quilts they had brought with them.

Shaw’s center fielder that day was a short, wiry man just a few months away from his twenty-second birthday. While his teammates looked vaguely comic in their beanie caps and baggy uniforms, the man in center field was tailored to parade-ground neatness. The only shabby thing was his glove, which was nothing more than a flimsy lace-less pad, not unlike a hot pad, that required him to use his fingers when he caught the ball. He played a shallow center field—not because he had great range but because he had a weak arm, the legacy of a boyhood fight in which it was broken.

Like most town teams, Shaw’s was semiprofessional, meaning the players, at least some of them, were paid, but not on a full-time basis. The Shaw nine played two games on Saturday, one on Sunday. The center fielder, along with the catcher, the pitcher, and the shortstop, were out-of-towners who were paid to play. Local, unpaid talent filled in the rest of the Shaw roster. In the middle of the game, a hat would be passed around and fans would be exhorted to loosen their wallets. The center fielder was paid $25 a week, which is the equivalent of about $500 today.

From this we can conclude that the center fielder’s baseball talent was above average, but just how far above is not known. At five foot four, he presented pitchers with a small strike zone and drew a lot of walks. What is certain is that he was one of the most popular players. He had a melon slice of a smile that crinkled the skin around intense, bleached-denim eyes. His teammates called him Merry Merrill, and he was the life of every party. One young lady of this day remembered in later years that everyone loved it when Charlie Merrill came to town, especially the young women, because he was so much fun.

Charles Edward Merrill was born on October 19, 1885, in Green Cove Springs, Florida, to Dr. Charles Morton Merrill and Octavia Wilson Merrill. He was the eldest of their three children and their only son. He had ancestral roots in the North as well as the South; his grandfathers had fought on opposite sides in the Civil War.

As a boy and an adult, Merrill had an abiding respect for the values and traditions of the Old South, which he inherited from his mother, who had been born on a Mississippi cotton plantation in 1861. An intelligent young woman from a good family, Octavia Wilson attended Maryville College, in Maryville, Tennessee. She was part of Maryville’s secondary school program, which boarded its students. There, when she was fifteen years old, she met Ohio-born Charles Morton Merrill, who was studying medicine at the college. He was twenty years old. Octavia and Charles courted by letter for almost seven years while Charles pursued his studies. He received his medical degree in 1881 from New York’s Bellevue College and Hospital, and on New Year’s Day 1883, Charles and Octavia were married.

Dr. Merrill suffered from asthma and after their marriage the couple decided to settle in Florida for his health. They moved to Green Cove Springs, a trendy, prospering resort town with a reputation for the curative powers of its mineral springs. The nation’s elite, including Astors and Vanderbilts, came there to drink and bathe. Charles Merrill became the town doctor and the owner of the village drugstore—a dual role that was common for the time.

At various times in his life, Charlie Merrill claimed to be a direct descendant, through his mother, of John Alden, the New England Puritan, signer of the Mayflower Compact and hero of a Longfellow poem. In successfully applying for membership in the Sons of the American Revolution, Merrill traced his father’s roots back to Nathaniel Merrill, who came to America in 1633.

Octavia Wilson, CEM’s mother, was the oldest of ten children of Edward and Emily Wilson, who owned Round Hill Plantation in Lexington, Mississippi. Her father, a private in the Confederate army, was captured during the siege of Vicksburg, and returned to fight again after being released in a prisoner exchange. The plantation survived the Civil War, but the family was impoverished during the Reconstruction years.

There is no question that the single most influential person in CEM’s life was his mother. As the eldest child, she had learned about responsibility and duty at an early age. An avid, lifelong reader, particularly of poetry, she graduated from the Maryville boarding school in 1876 at the age of fifteen. Over and over, she told her only son of the value of education and the obligation he had to succeed at some worldly endeavor. CEM remembers her saying to him, Charlie, you can get anything in the world you want, as long as you want it bad enough.

According to a story Octavia Merrill told her grandchildren, CEM had just learned to talk when she took him out on the porch one night to show him the moon. He pointed his arm straight up and began yelling, I want it! I want it! He threw a tantrum on her lap when he didn’t get his wish.

CEM’s entrepreneurial talents surfaced early in Green Cove Springs, which sat on the banks of the St. John’s River, about thirty miles downstream from Jacksonville. Every winter the town hosted Northerners who came to drink its medicinal waters and bathe in its sulphur pools. White Sulphur Spring flowed at the rate of three thousand gallons per minute and was impounded into a pool that, according to the local Chamber of Commerce, offered the bather long life and good health. At the age of eight, Charlie Merrill would bet visiting Yankees a dime that he could cross the pool underwater faster than the dupe could swim it above water. Diving down, Charlie would crawl across the bottom of the pool aided by a swift current unknown and unavailable to the swimmer above him.

Charlie worked all day on Saturdays and for four hours on Sunday in his father’s drugstore, and he soon came to be called Little Doc. At the age of twelve, he decided to raise soda fountain revenues by adding grain alcohol, readily available in the pharmacy, to the standard soft drinks for selected customers. The new hard drinks cost more money, and for a few weeks in 1897 drugstore revenues soared to all-time highs as word spread that spiked drinks were available at the soda fountain. As soon as Dr. Merrill discovered his son’s merchandising tactic, he ordered an end to it.

Forty-two years later in an interview for an unpublished biography, CEM said that his first retail experience convinced him there must be a better way to run a store: Even as a boy, it was obvious to me that the best that could be expected from a retail store, under conditions that existed in those days, was a very poor return on the capital and risk in the business, and practically no return if the business had been charged the proper salaries for the efforts and time of my father and myself. The turnover was so slow, and the credit losses were so large, that notwithstanding a very high margin of profit, there was almost nothing left at the end of the year. Naturally, my father had to interview a steady stream of traveling salesmen, keep the books, and perform sundry duties in and about the store, all of which drew heavily on his time and resulted in the neglect of his practice. The hours of labor were long; the store opened at seven o’clock in the morning and closed, theoretically, at twelve o’clock at night; as a practical matter, it was open almost twenty-four hours a day. On the shelves of this store, there must have been twenty-four thousand items, and my best recollection is that more than half of these items didn’t sell once a year, and incidentally, the soda fountain department and the store, generally, were quite unsanitary. Today in studying a modern drugstore, the mystery of how my father and I managed to eke out our living still remains unsolved.

In 1898 the Merrills attempted to improve their fortunes by moving to Knoxville, Tennessee, and when that didn’t work out, they returned to Florida and set up residence in Jacksonville. However, this wasn’t the answer to their cash-flow problems, either—and thirteen-year-old Charlie continued to be a young man of many enterprises. On his way to a Sunday-school picnic on May 8, 1898, he passed a railroad station where the latest copies of the Florida Times-Union and Citizen were being unloaded from a Tampa-bound train. The Spanish-American War was raging, and it was easy to read the headline: DEWEY TELLS STORY OF HIS VICTORY. Charlie spent all his money, $5, to buy a hundred copies, which he lugged out to the picnic grounds and hawked for twenty-five cents each. Patriotic, news-hungry buyers, eager to learn of the destruction of the Spanish fleet, gladly paid extra to read the good news. Merrill called this my first financial coup.

Like Horatio Alger, Charlie became a newsboy. He peddled the Times-Union on Ward Street in the heart of Jacksonville’s red-light district. Though family legend holds that the street’s customers bought the papers to hide their faces, it was far more likely that the prostitutes bought most of them. And they tipped generously. He also repeated his Spanish-American War coup in 1901 when President William McKinley was assassinated. So successful was the Ward Street adventure that when it came time to sell the concession, he asked for and received $75, the modern equivalent of about $1,500, from another boy.

Compared to the lure of his business activities, school held little interest for the young Merrill. This concerned his mother, who intended to prepare her son for success by sending him to one of the prestigious Northern colleges. In the fall of 1901, she took him out of Jacksonville’s Duval High School and enrolled him in the John B. Stetson University, a preparatory school in Deland, Florida, about fifty miles south of Jacksonville. Stetson was considered the best prep school in the South—but by Northern standards that still wasn’t very good.

During Charlie’s final year at Stetson, his father was robbed and brutally beaten as he went for an after-dinner walk near his home in Jacksonville. Dr. Merrill was in a coma for several days, and his survival was in question. Charlie was called home from Stetson for what he later called those dreadful weeks. The elder Merrill regained consciousness, but he was confined to a wheelchair for months and unable to practice. Word circulated among his professional peers and patients that his skills as a physician had been permanently impaired, and, in fact, Dr. Merrill, only forty-six years old, never recovered physically or economically.

Octavia Merrill responded to the financial crisis by opening two boardinghouses (one for whites, the other for blacks), but money was still scarce, and there was a steady stream of letters from Stetson financial officials, who were undergoing their own budget crisis, demanding payment for overdue bills. Charlie left Stetson before completing his final year—but apparently for disciplinary rather than financial reasons. According to CEM’s son, Charlie was expelled from Stetson after he dropped a cracker box of water from a fourth-floor dormitory window on a professor, whom he had mistaken for a classmate.

Still, his mother was steadfast in her determination to send Charlie to one of the better colleges in the North. Toward that end, the family sold a small piece of land they owned in Miami, and with these profits, plus an athletic scholarship, Charlie went north to Massachusetts’s Worcester Academy for another preparatory year.

CEM’s time at Worcester, the 1903–04 academic year, was an unhappy one. As a Southern boy of modest means, he was shunned and ridiculed by the New England elitists of the all-male student body. Some of his Northern classmates complained that they could barely comprehend his drawling speech. And there was a definite stigma to receiving financial aid. CEM paid only $185 of the estimated $700 annual cost to attend Worcester and was obliged to live on the top floor of Davis Hall with the other athletes, who were scorned as hired hands. Even with the scholarship, Charlie had to work by waiting on tables in a dining hall and selling suits for a local clothier on a commission basis to wealthier students on campus.

If the Worcester athletic program expected to get a superstar in Charlie Merrill in exchange for their scholarship, they were hugely disappointed. He was decent at baseball and became the team’s center fielder. He also went out for football, but at 114 pounds or so he was relegated to the second and third strings, seldom actually played in a game, and suffered a broken nose in practice. There is a story—widespread, probably apocryphal and apparently originating with CEM himself—that lightweight Charlie Merrill would get into a game when the team needed a few yards because they could throw him over the line of scrimmage. This, like most of the stories passed on by CEM through his children, must be taken with not a few grains of salt. While there is a basic truth in them, this truth was often embroidered because they were usually intended as fatherly advice or cautionary tales.

With his work schedule and athletic obligations, Merrill had little time for academics at Worcester, and it is not surprising that at the end of the year he didn’t have enough credits to qualify for a diploma. In the end, though, school officials agreed to an unusual arrangement whereby they would grant him his diploma if he could successfully complete his first year at Amherst College. Amherst officials allowed him to enroll through a backdoor provision of the admissions policy.

That summer CEM worked as a waiter in a hotel on an island off of Portland, Maine, where he received a salary of $5 a week plus lodging, meals, and tips. He was there for sixteen weeks, and at the end of each of them he walked to the post office, where he wrote a $5 money order to himself and mailed it to Amherst with a note on the envelope: Hold Until Called For. When he arrived on campus in September, there was $80 waiting for him.

In the fall of 1904, Octavia Merrill fulfilled one of her dreams for her son by seeing him enroll in Amherst College as a freshman. Indeed, she was waiting for him when he arrived on campus from Maine. Merrill was initially flustered by this maternal presence, but his embarrassment dissipated when Octavia proved to be a popular figure with his new classmates. Still, later in life he told his own son that he had every card in the deck stacked against him at Amherst. He was short, poor, spoke with a Southern drawl—and arrived on campus with his mother. Charlie would remain at Amherst for two years, and though his time there had some shining moments, he was dogged by financial problems. Decades later, in a letter accompanying an academic gift, CEM said, I want to help relieve the tensions which develop in young men from a lack of funds to carry out their education. During my high school and college years I felt a burden of pressure almost too heavy for me to bear.

He earned his meals by donning a white jacket every evening and waiting on his Chi Psi fraternity brothers at a boardinghouse (Amherst had no dining facilities). Again he sold men’s suits, taking a portion of his 15 percent commission in clothes for his own wardrobe. This haberdashery operation netted him $1,300 in his sophomore year and allowed him to be fashionable and well-dressed. However, he was embarrassed by his modest finances, and he believed that wealthier students bought clothes from him just to be nice to Charlie Merrill, who had no money. In the fall, Merrill supplemented his income by raking leaves for fifty cents an hour.

His athletic career at Amherst is encrusted with myth (the story about being tossed over the line of scrimmage in football games was often repeated). CEM tried out for the cross-country, football, track, and baseball teams—failing in each case to make the varsity squads. He played baseball on what today would be called intramural teams rather than at the intercollegiate level.

Work and athletics did not stand in the way of his social life. Although he always felt like an outsider at Amherst, Merrill’s party spirit and Southern geniality made him popular among his peers. He joined Chi Psi immediately and lived his second year in the fraternity house, where he was assigned the smallest room. CEM was a typical and enthusiastic fraternity man. His good looks and sunny disposition won over both his Chi Psi brothers and the attractive women who flocked to fraternity parties. He achieved hero status early by managing to capture the class flag in the traditional freshman-sophomore rivalry. He also shone at the annual Chapel Rush, a free-for-all in which freshmen tried to roll sophomores down a hill and vice versa. According to classmates, CEM jumped on the back of a huge football player, seized him around the neck, and managed to roll him down the hill—reminding one eyewitness of a monkey riding an elephant.

There were about five hundred students and forty faculty members at Amherst at this time. Classes were small, and daily chapel attendance at 8:15 A.M. was compulsory. Academically, CEM was average. He showed some aptitude for mathematics, but none whatsoever for foreign language. At the end of his first year, his French professor offered to give him a passing grade on the condition that he not take French the following year. His best class was English, where he earned consecutive B’s in his final three semesters. He was honing a talent for writing clear, direct, concise, and occasionally eloquent prose that would show up much later in hundreds of business letters and memoranda.

At least partially because of financial anemia (Amherst at this time cost about $300 a year, the equivalent of about $6,000 today), CEM left the school at the end of his sophomore year in 1906. He missed his fraternity buddies, but it was not until he had secured his fortune that he developed an affection for his ersatz alma mater. In 1927 he donated $100,000 (about $918,000 in current dollars) to the school—on the condition that it be used to help financially needy students. He funded several scholarships and received an honorary Doctor of Laws degree from the college in 1943. In a biographical form filled out in 1947, Merrill wrote, For the past 20 years my main hobby has been to help promising boys through school and college—total now about 300—and have kept in close touch with educational problems in many schools and colleges.

Over the years, CEM took great pride and satisfaction in attending the annual Amherst reunions, though at first he got a cool reception. It took me [many years] after leaving Amherst to be accepted by my former classmates as an equal, and as a friend, he wrote in a 1948 letter to his son. In the first place, I went there only two years, and, in the second place, success came to me early. In the first ten years after leaving College, I could tell that the subject of the conversation would abruptly change when I entered the room. This I now know was perfectly understandable, and a characteristic trait of human nature. Most fellows, when they come back to a reunion simply cannot resist from bragging about their accomplishments. I know now it was difficult, if not impossible, for a Court Reporter, or Principal of a small High School, to continue his bragging when I came into the room. Please do not misunderstand me; I certainly was not shunned, but, on the other hand, I was not taken into the fold. However, as the years passed by, and my classmates found out that I didn’t have horns or even antlers, they began to unbend, and ended up by according me the same welcome—no more and no less—that they gave to all their other old friends.

Charles Merrill, Amherst ’08, enlivened many of the reunions. At one such affair during Prohibition, a breakfast meeting was moving at a painfully slow pace until CEM leapt to his feet and exclaimed, Well, I used to do this in college—I guess I haven’t forgotten how. He walked over to a serving table, pulled out a flask of forbidden bourbon, and filled each waiting grapefruit half with the amber liquid.

Near the end of his time at Amherst, CEM became embroiled in an issue that illustrates one of his strongest traits: loyalty. A fraternity brother was caught cheating on an exam and expelled from school. The fraternity hierarchy, spurred on by a powerful alumni segment, also sought to oust him for life from Chi Psi as an example to other brethren. Charlie opposed the move because it amounted to hitting a fraternity brother who was already down and it violated the principles of comradeship so important to fraternity life. The dispute ended in a hollow compromise that expelled the miscreant for only five years rather than life.

As he would later acknowledge, CEM was on the wrong side of this issue. Honesty was more important than blind loyalty, and as a Wall Street businessman, he would make that distinction many times. But as a twenty-year-old undergraduate, Merrill allowed his lifelong sense of personal loyalty to take precedence.

Two important non-academic events occurred in the life of Charlie Merrill during his final year at Amherst. In the first instance, he was spending Christmas break at a friend’s house in Mount Vernon, New York, when he received the tragic news that his sister Mary had died from diphtheria at the age of three. Charlie had been away at school during her entire lifetime and he barely knew her. CEM remained convinced for the rest of his life that the financial straits of the Merrill family had prevented his sister from getting the proper medical care that would have saved her life. He told his son a half-century later in a letter: The fact my father knew how to save his daughter’s life, and yet, because of limited finances did not possess the equipment, crushed him. Money, of course, is not everything, but, my friend, emergency after emergency comes up in this world of ours, in which for a few brief moments, at least, and maybe longer, money is the equivalent of everything.

The other event was a happier one. He began dating Marie Sjostrom, a student at Smith College, which was a half-hour streetcar ride away in Northampton. They were seen together at college functions and fraternity parties, and by the spring of 1906, Charlie Merrill was in love for the first time—though certainly not the last.

Amherst also became an important bond between Charlie and my father. Eight years younger than CEM, my dad graduated from Amherst in 1916 and shared Charlie’s love for baseball (he was the manager of the Amherst baseball team and a lifelong Yankee fan). Dad’s baseball genes were passed down to my brother, Bardwell, who played varsity baseball at Yale with George Herbert Walker Bush. Years later Charlie donated the money that built three faculty houses and named one after my father. When I attended Amherst myself, I joined Chi Psi and the legacy of Charlie Merrill was manifested in the magnificent stained-glass window in our fraternity library that Charlie had donated. The new science building was also named in his honor.

By the time Charlie left Amherst, the Merrill family had moved to West Palm Beach, and at the end of Amherst’s 1905–06 academic year, Charlie went home and spent the summer playing semipro baseball and helping to put out the local paper, the Tropical Sun. The editor of the paper had tuberculosis and Dr. Merrill had suggested he spend a few months in Arizona to improve his health, meanwhile recommending his son as a temporary replacement. Though CEM claimed later that he put out the paper single-handedly, there were at least two or three others who wrote and edited.

It was during this time that Palm Beach was beginning to emerge as a kind of American Riviera, attracting blue-blood families like the Vanderbilts, the Rockefellers, the Morgans, the Carnegies, the Mellons, and the Drexels. Within twenty-five years, they would be joined by the Merrills. The showpiece of West Palm Beach during the summer of 1906 was the Royal Poinciana Hotel, the largest hotel in the world, with facilities for two thousand guests. The six-story wooden structure, painted yellow and white, had a baseball diamond ringed with palm trees, and it was here that Charlie Merrill patrolled center field (and occasionally right field) for the town semipro team. Surviving box scores show that CEM batted low in the batting order (indicating he was not one of the better hitters) and seldom had more than one hit per game, often none at all.

Meanwhile, Charlie was a jack-of-all-trades at the semiweekly Tropical Sun—reporting, editing, selling ads. He came to work at seven-thirty every morning, took time off at noon to practice with the team, then went back to the newspaper until early evening. Weekends were for baseball. Charlie numbered these days among the happiest in his life.

Journalistic scruples were virtually nonexistent at this time, and CEM used every opportunity to promote the baseball team in print. The Tropical Sun for July 1, for example, promised readers that those who want to witness what will doubtless be the very best game that will be played on the East Coast this season cannot afford to miss next Monday’s game. On July 18, reporter Merrill wrote, Decidedly the best baseball ever witnessed on the Poinciana diamond was the game played Monday afternoon, when West Palm Beach shut out St. Augustine by a score of 2 to 0. The August 1 edition described a road contest that was the most exciting game ever played in Miami, and contained this item on the front page:

West Palm Beach is soon to have another drug store. Dr. Chas. M. Merrill, a prominent local physician, having leased the store room in the Masonic Temple, Clematis Avenue, formerly occupied by Miller & Co., in which he will, some time in the month of August, open an up-to-date retail drug store.

Dr. Merrill has had considerable experience in the drug business, having for a number of years successfully conducted a drug store in Green Cove Springs. He is now placing orders for his stock and fixtures, and will probably have his store open by the last of August.

There were no bylines on the articles, but Merrill’s florid, cheerleader style is unmistakable.

CEM’s brief journalistic career taught him the importance of public opinion and its role in shaping events. It was a happy summer for twenty-year-old Charlie Merrill, and he believed that he learned more than he had in his previous two years at Amherst. "On the Sun, he said later, I learned to meet people and I learned human nature. It was the best training I ever had."

CEM earned $25 a week for his baseball skills and another $17 for his journalistic efforts, managing to save $75 during his three months in West Palm Beach. He needed every penny of it in September, when he enrolled in the University of Michigan Law School. With the continued decline of the family’s finances and his father’s practice, there was even more pressure on him to establish himself in a remunerative endeavor.

The idea of a law career was not CEM’s but rather came from his maternal grandmother, Emily Wilson, who envisioned him entering politics and one day becoming governor of Mississippi, where many of his maternal relatives still lived. She raised the money for his tuition from family members, including his uncles, Augustus, Edward, and Bayard Wilson.

Charlie boarded the train for Ann Arbor on September 27, 1906, and almost immediately after his arrival he became a popular, sought-after figure on campus. Despite his Southern accent, the two years at Amherst had enabled him to affect an air of an Eastern sophisticate. Quickly he was inducted into the local Chi Psi chapter and installed as chapter steward, which paid for his room and board. The position involved buying supplies and planning meals, and he found this work far less menial and demeaning than waiting on tables.

Charlie continued his baseball career by playing for the law school’s team under his own name and for the engineering school team under another name. When the two teams met on the field, he didn’t show up for the game. As his campus social standing rose, his grades descended, and by the end of the year he failed to pass three of his six subjects—Contracts, Real Property, and English. His courtship of Marie Sjostrom continued with long letters, and he returned to Amherst in early 1907 to escort her to a Chi Psi dance. She came to Ann Arbor in June for the fraternity’s commencement dance, and around this time, the couple became engaged.

After Marie returned East, it was clear that Charlie’s law career was over and his days at Michigan were numbered. He took a job as a night clerk at a local hotel, and apparently caroused so extensively that he had to bribe the night watchman to keep him awake on duty. A few weeks later, he received with delight and relief a telegram from Uncle Augustus informing him that he had a summer job as Shaw’s center fielder if he wanted it. So he went to Mississippi and spent the summer doing what he loved best.

At the end of the season, the people of Shaw gave their popular center fielder a going-away party. Earlier, they’d taken up a collection that paid for a one-way rail ticket to New York, and CEM wasted no time getting moving. The very next day found him heading north on the Yazoo and Mississippi Valley Railroad. The flat land seemed to blaze and buckle in the heat. It was a green sea of cotton plants that in a few weeks would be covered with fluffy white fiber.

If Charles Edward Merrill had had a résumé, it would not have been very impressive: prep school disciplinary problem, two-time college dropout, drinker, and all-around reveler. In these days semipro baseball players were on a level with sailors and carnival roustabouts in terms of public esteem. But now he had a job on Wall Street. He felt foolish because he only knew one person in New York: Marie Sjostrom’s father, motivated at least partially by self-interest, had gotten him a job as a clerk at a salary of $15 a week.

In a few days, Charlie Merrill would be in New York, and in a few weeks he would be twenty-two years old. Not long after his thirtieth birthday, he would be among a few hundred Americans who would earn a million dollars in a single year.

Young Charlie Merrill (eighth from the left) at a church picnic in Green Cove Springs, Florida.

Charlie was an active member of Chi Psi at Amherst College. The stained-glass window he later donated to the fraternity was still there when I joined Chi Psi in 1968.

Charlie Merrill and Eddie Lynch met each other at the Twenty-third Street YMCA in New York City and within a couple of years they both became millionaires.

Chapter Two

The Odd Couple

(1907–1915)

There were still more than two thousand working farms in New York City when Charlie Merrill arrived in the fall of 1907, but the city was well along the road toward becoming the nation’s business colossus. Down at the southern tip of Manhattan, tall buildings climbed skyward like vines seeking sunlight. Henry James wrote of the multitudinous skyscrapers standing up to the view, from the water, like extravagant pins in a cushion already overplanted. So concentrated was this accumulation of steel that the captains of ships approaching New York Harbor claimed their compasses strayed by as much as seven degrees. A third of America’s exports and fully two-thirds of its imports were handled on the city’s wharves. Meanwhile, new industries were being born almost daily. Indeed, the movie industry had just begun when CEM arrived. A few blocks from where Charlie rented a fourth-floor room for $6 a week, Scott Joplin had just set up an office to compose and arrange ragtime.

In Lower Manhattan, about half of America’s two hundred largest corporations, including U.S. Steel, General Electric, Standard Oil, Western Union, and American Telephone & Telegraph, built towering cathedrals of commerce to house their growing armies of clerical workers. They overflowed from the real Wall Street, and the figurative Wall Street was ever-expanding to include Cedar, Pine, Broad, Nassau, William, Exchange Place, and Lower Broadway. Bells from the great Gothic tower of Trinity Church pealed the start of the Wall Street day, and every New Year’s Eve at midnight, masses of reveling people came down and listened to it chime in the calendric moment of change (though when The New York Times moved into its new Midtown quarters on January 1, 1908, it began a custom of dropping a ball to greet the new year in what everyone would soon be calling Times Square). The temple-like building housing the New York Stock Exchange had just been opened four years earlier, and sightseers still marveled at the seven white columns on the outside and the trading hall, which was one of the largest rooms, with one of the highest ceilings, in the world.

But just as there would be 101 years later, panic was in the air as CEM came on the scene. Wall Street’s overextended financial markets were shredding; bankers were resigning under barrages of criticism, and when any bank was mentioned in the newspapers, lines began forming at its doors. The run on the banks began after a group of speculators headed by F. Augustus Heinze made an unsuccessful attempt to corner the stock of United Copper. J. P. Morgan engineered an end to the panic and averted further bank failures and the closing of the Stock Exchange itself. It was the last hurrah for the seventy-year-old Morgan, and it would be two decades before the emergence of Wall Street’s next great figure: Charles Edward Merrill.

The Panic of 1907 was one of the worst in Wall Street history, and it crystallized growing concerns in Congress about stock market trading and its threat to the economic welfare of ordinary Americans. Investing in stocks was considered only slightly more respectable than gambling, and it was outlawed in several states. There was no Federal Reserve System to manage the flow of money, and there was no Securities and Exchange Commission to regulate the stock market. This was the Wall Street where Charlie Merrill began a kind of apprenticeship in finance that would last some six years.

The Young Men’s Christian Association had just opened a branch on Twenty-third Street, and in 1907 its ranks swelled to include Charles Edward Merrill, just arrived from Florida by way of Massachusetts, Michigan, and Mississippi, and Edmund Calvert Lynch, just arrived directly from Baltimore. Both young men were born on the nineteenth day of a month in 1885, both were the first of three children, and both came to the Y to swim in the yellow-tiled pool on the sixth floor.

Merrill had just started working as an office boy for a group of textile companies run by his prospective father-in-law, P. Robert Sjostrom, who had arrived in America with his parents from Sweden in 1868 when he was eight years old. Sjostrom was now a highly paid (about $800,000 a year in modern dollars) treasurer for the Einstein-Wolfe group, a holding company for six textile mills in the metropolitan New York area. Merrill was paid $15 a week, and his rent was $6.50 a week for a fourth-floor room that lacked, among other amenities, a closet. Lynch was earning $12 a week, plus commissions, as a salesman. He had a well-located, spacious apartment on West Thirty-sixth Street, but it cost $10 a week. Lynch was in a tight financial squeeze, but he had been told by his landlady that she would reduce his rent to $8 if he could find a roommate who would also pay $8.

Merrill and Lynch had been nodding acquaintances at the Y for a few weeks, until one day late in 1907 or early in 1908 (neither party ever recalled the exact date), Merrill had just descended the spiral staircase from the sixth-floor pool after his swim and was standing in line waiting to pay his fifty-cent monthly dues. The main lobby was finished in hardwood, mainly oak and walnut. An Oriental rug was centered on the floor, and marble columns rose to a high ceiling from which Victorian light fixtures, modern and electrified, were suspended.

An inscription over the main entrance read ENTER HERE TO BE AND FIND A FRIEND and beneath it strode Lynch—a stocky, square-jawed figure in a straw hat. Spying the waiting Merrill through his thick-lensed glasses, Lynch walked over. As Merrill remembered it, after a few minutes of chitchat Lynch asked him if he liked his present living quarters. When Merrill said no, Lynch invited him to inspect his place on Thirty-sixth Street. Merrill went there and was impressed, but he was put off when Lynch said he was paying $10 a week. Lynch did not mention the landlady’s $2 reduction offer. Instead, he pressed his case, enumerating the advantages of his situation: The apartment was only three flights up instead of four; it was closer to work, so he could eat lunch at home and save money; there was a nice backyard, and it had a big closet. In addition, he had secured an agreement from the landlady to reduce CEM’s cost to $8 a week. Surely, all this was worth another $1.50 a week.

The sales spiel droned on, and finally Merrill agreed to move in with Lynch just to get him out of my hair. Only much later did he learn about Lynch’s agreement with his landlady that reduced his own rent from $10 to $8. Thus Merrill had his costs raised by 25 percent while Lynch realized a 20 percent reduction. When he told this story decades later, Merrill said, That son of a gun, in our very first deal he got the best of me.

It would be another seven years before they would become business partners, but the meeting at the YMCA marked the beginning of a bittersweet relationship that would span three decades until Lynch’s untimely death in 1938. Moreover, their two names would be inseparably linked in the popular mind in the manner of Sears and Roebuck, Mason and Dixon, Barnum and Bailey, and by the time the century turned again, people would associate the name Merrill Lynch with financial services the way they associated Kleenex with tissues, Xerox with photocopies, and Scotch with tape.

The Merrill-Lynch living arrangement lasted only a few months, but the two young men became friends. Despite stark personality differences (Merrill was trusting, diplomatic, instinctive, imaginative, and an initiator; Lynch was suspicious, brusque, cautious, and a troubleshooter), they respected and complemented each other. They would spend hours together in public libraries boning up on business strategies.

Those were the days when New York had more than its share of glamour for many people, and certainly for two poor boys from out of town, Merrill wrote in a memoir. The very year that Eddie and I came to New York, we had to face a panic; dozens of banks failed; there were cues [he meant queues] of people sometimes two blocks long standing in line to draw money out of the banks that didn’t fail. We, of course, were ‘babes in the woods’ and didn’t know whether or not the companies we worked for would survive or fail.

Eddie Lynch, as he would become known on Wall Street, was born on May 19, 1885, in Baltimore to Richard Hinkle Lynch and his wife, the former Jennie Vernon Smith, who, like Octavia Wilson Merrill, would exert a powerful influence on her son well into his adult years. When he met Charlie Merrill at the YMCA, Lynch had just come to New York to work as an office boy for Liquid Carbonic, a manufacturer of soda fountain equipment. He had studied economics, logic, and psychology at Johns Hopkins University in his hometown and graduated in three years rather than the usual four. As a sprinter on the college track team, Lynch sometimes used his wits to defeat speedier opponents. One story that would become a favorite of Merrill’s (whether it was true or not) told how Lynch studied in minute detail the habits of starters just before they fired—thus enabling him to get off the mark a split-second before the rest of the field.

Charlie Merrill’s strategy when he arrived in New York was to achieve financial security by marrying the boss’s daughter; his choice of employer had nothing to do with career plans—but it was extraordinarily fortuitous. Sjostrom, though only forty years old, was a seasoned veteran of finance and a born teacher. Merrill, for the first time in his life, was an eager student. When Sjostrom died in 1937, Merrill wrote his widow: I came to New York alone and friendless, except for the Sjostroms. Robert, from the start, took me to his heart, watched over me and trained me, as if I were his son. He was kind and gentle always to me, and so far as my career is concerned, he gave me, in two years, not only the rudiments of business, but a post-graduate course as well.

On Merrill’s first day with Sjostrom, the company’s Manhattan office was moved to a new location about a block away, and Merrill was conscripted to help carry books, files, and other items from the old place to the new. He feared greatly that he would come across some friend from Amherst who would witness his menial labors. Another early task was to deliver the payroll to a mill in Patchogue, New York, about fifty-five miles from the home office. During the Panic, employees insisted on being paid in silver dollars, and for a while Merrill had to lug two suitcases full of the coins to the train station, ride the Long Island Rail Road for two hours to Patchogue, and then trudge two miles to the mill.

As a twenty-two-year-old office boy, Merrill scored a financial coup by obtaining for his prospective father-in-law’s company a badly needed $300,000 short-term loan from the new National Copper Bank—despite the tight money market of the Panic. CEM tells of being politely turned down by officer after officer but persisting until he was allowed into the office of Charles H. Sabin, the bank president, who—either because he was impressed by the young man’s tenaciousness or wanted to get him out of his office—approved the loan. Sjostrom was very pleased and treated his precocious employee to a special lunch (pig’s knuckles, Rhine wine and coffee cakes, as Charlie remembered it) and gave him a blank check to buy the best suit of clothes in New York City. CEM went to Sandford and Sandford, a popular and fashionable clothing store at the time, and spent $100, but he would have preferred to have gotten a salary increase. The last thing I needed was another suit of clothes. I had a trunk full from college days. I did need a raise. Milk and crackers for lunch are not the proper prelude to a siesta.

Soon Merrill was promoted to credit manager and was making $100 a week (about $2,000 in today’s dollars). He began saving money, and one of the first things he did was to pay off the $1,750 mortgage on his parents’ home in West Palm Beach. He considered this to be his first investment, and throughout his life counseled that the very best investment anyone could make was to pay off one’s debt. Merrill would work twelve hours at the Manhattan office and then often be summoned to Sjostrom’s apartment in suburban New Rochelle to work long into the night. He also worked there on weekends—and rankled his fiancée for his lack of attention to her. The long hours went on for nearly two years, and in later life Merrill called the experience the equivalent of a university course in business.

But Merrill didn’t see this advantage for quite some time, and many years later he told an interviewer:

I didn’t realize at the time the training that I had under Mr. Sjostrom in accounting, cost accounting, elementary financing such as short-term notes, bank borrowings, and things of that routine character would come to help me or rather form the background of my thinking and activities in years to come. For instance, under Mr. Sjostrom I learned that a credit man, if too conservative, is a great handicap to the sales department. I remember distinctly going in to Mr. Sjostrom with a report on the losses of the credit department of which I was manager. In my ignorance I was very much pleased and expected a pat on the back because of my phenomenal record. Under my regime the losses had been cut from a quarter of 1% on sales or more and I was very much taken aback when Mr. Sjostrom told me that was not my job—my job was to find growing concerns that had able management regardless of the capital, and if the moral risk was fine and the experience of the man running these companies or firms was good, then Patchogue Belsen and other companies for which I was credit manager should extend credit to these companies.

CEM’s time at Sjostrom’s company was important for another reason, for as credit manager he noticed that the best customers were the new chain stores. They were stable, they bought in large volume, and they paid promptly. Frank W. Woolworth’s success in marketing low-cost consumer goods had sparked a revolution in retailing, and other merchants—S. J. Kresge, John G. McCrory, and S. H. Kress—had formed similar chains. Charles Walgreen had just launched a drugstore chain in Chicago. Their success intrigued him, and not only did Merrill invest his own money in chain-store equities, he studied these operations while he was with Sjostrom. It was obvious to me that the chains offered standard merchandise to the public at substantially lower prices than were obtainable elsewhere. I became convinced that there was a wonderful opportunity for any business that would cut loose from obsolete methods on the one hand, and not attempt to profiteer on the public on the other.

But personal matters sidetracked Merrill from his interest in chain stores. For reasons that are unknown except to the immediate parties, the three-year engagement to Marie was broken. The romance was over and so was his career in the textile business ([I] had to get the hell out of that situation, he recalled). The summer of 1909 found Charlie Merrill back at the University of Michigan Law School, where he told his friends he was enrolled as a student. However, Michigan Law had no summer session in 1909, and it is very likely that he spent most of his time enmeshed in the campus social life to soothe the wounds from his