Merrill Lynch is one of the Wall Street brokerage firms that engage in financial management and advisory services. It serves as a dealer in the sale and purchase of corporate securities, as well as a broker for individual clients, corporations, institutions, and governments across the globe.
Merrill Lynch also provides strategic advice about investment and wealth management. Bank of America acquired the firm between 2008 and 2009 as part of its wealth management division. It handles a total client asset of about $1.3 trillion worldwide.
The company, alongside another investment banking arm called BofA securities, engages in broker-dealer and prime brokerage activities.
Headquartered in the World Financial Center in New York City, Merrill Lynch operates an electronic trading platform known as Merrill Edge.
Merrill Lynch is a holding company in Wall Street that provides financial planning services, investment advisory, and brokerage services.
Merrill Lynch underwent several name changes and acquisitions over time before it transformed into a holding company in 1972.
It is a fully-owned subsidiary of Bank of America, where it serves as a wealth management company.
Understanding Merrill Lynch
History of Merrill Lynch
Merrill Lynch was founded in 1914 by renowned bond investor Charles E. Merrill. After a year, Merrill brought his fellow investor Edmund C. Lynch on board as a partner. The appointment changed the name of the company to Merrill Lynch & Company. The new company prospered by engaging in underwriting chain stores’ securities and assisted merging firms with the necessary financial backing.
As a result, the company helped organize new investment firms, such as RKO Pictures in 1921 and later, Safeway Inc. in 1926.
By 1930, Merrill led the restructuring of Merrill Lynch & Company by divesting its retail division to E. A. Pierce & Co. to focus on investment banking. It later became Merrill Lynch, E.A. Pierce & Cassatt after acquiring all of E. A. Pierce & Co together with Cassatt & Co in 1940.
Merrill Lynch continued with acquisitions until 1952 when it became a holding company. At this time, with its name as Merrill Lynch, Pierce, Fenner & Beane, it actively engaged in broker-dealer activities with the outstanding companies’ stock based on their capital reserves.
The new company emerged as the largest security firm in the world due to the merger with a strong presence in the government security market, evidenced by offices in over 98 cities and its name on 28 different exchanges.
It continued to flourish through its subsidiaries by offering security trading and brokerage services. This, in turn, enabled it to provide new and unique money market products, as well as investment and advisory services to its clients regarding government securities.
Much of Merrill Lynch’s success is attributed to its brand recognition and brokerage network of more than 15,000 in the whole world. It reformed to a public company in 1971 through an initial public offering, which offered its member companies securities to become publicly owned.
By this time, it could use its interests and that of clients to move bonds, stocks, and securities.
Bank of America’s Takeover of Merrill Lynch
In late 2008, Bank of America announced an agreement to acquire Merrill Lynch to rescue it from possible bankruptcy. The company entered the mortgage market and started selling repackaged home loans on the debt markets.
The subprime mortgage crisis of the early 2000s triggered losses at Merrill Lynch, just like other companies on Wall Street. Following the 2008 subprime mortgage crisis, the company recorded significant credit default and bad investments that far exceeded the face value of its underlying corporate bonds, given its exposure in the subprime market.
The initial idea was that those market derivatives would help diversify risks and stabilize risk-taking, but Countrywide’s stock collapsed, forcing Merrill Lynch to write off $8.4 billion in holdings.
However, on September 15, 2008, Bank of America bought the company when it was on the verge of bankruptcy. As with similar transactions, the Federal Reserve under the Bank Holding Company Act reviewed and approved the deal.
Today, the company is Bank of America’s wholly-owned subsidiary with the name Merrill Lynch Wealth Management Company.
Merrill Lynch and Valuation of Financial Instruments
Valuation for exchange-traded products
Proper valuation of financial instruments is a vital element of Merrill Lynch’s preparation of financial statements. Quoted market prices determine the fair values of exchange-traded derivatives and certain options.
On the other hand, the amount estimated to be received from transactions defines the fair values for OTC derivative financial instruments, swaps, and options.
The pricing models used in valuing the derivatives are based on the net present value of estimated future cash flows while considering Merrill Lynch or the counterparty’s credit ratings.
Complex or new financial instruments may attract limited or immature markets. It means that pricing models used for valuation usually incorporate assumptions and significant estimates, which may affect the consolidated financial statements’ precision level.
Valuation for long-dated and liquid contracts
Extrapolation methods are applied to market data in the cases of long-dated and liquid contracts. It is done to estimate assumptions and inputs that are indirectly observable. As a result, Merrill Lynch can consistently mark-to-market all positions when some market prices are directly observable.
Observed information about the costs of hedging the risks is used to verify the values of OTC derivatives. The pricing models are continually refined to enable Merrill Lynch to correlate closer to the market.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: