Winning back Main Street’s trust
Q&A with son of a Merrill Lynch founder.
Regaining America’s trust has been one of the biggest challenges of the financial services industry after the worst financial crisis in a generation. But six years and counting after the crisis, Wall Street has been hard-pressed to satisfy Main Street and win back the people’s confidence. What will it take for individuals to believe the banks have their best interest at heart? For answers I turned to someone who has witnessed the collapse in trust firsthand. Winthrop H. Smith Jr. is the son of one of the founders of Merrill Lynch. As a boy, he watched his father fight for the little guy. But today, almost 100 years later, and a sale of the firm to Bank of America in 2009, he is still looking for such efforts. He recounts how it all changed in his new book, Catching Lightning in a Bottle: How Merrill Lynch Revolutionized the Financial World. Our interview follows, edited for clarity and length.
Q: Why did you write this book?
A: I thought the real story of Merrill Lynch needed to come out, especially now as we near our 100th anniversary. There is confusion about what the real Merrill Lynch was and what ‘Mother Merrill’ stood for. I’ve wanted to make sure that the story of my own father’s role in the formation of Merrill Lynch with Charlie Merrill back in the 1930s was told. There was great sadness from the families of Merrill that it ended the way it did. I still have a number of relatives working there who are feeling very good, but there is still sadness that the Merrill Lynch and Company that we knew in 2001 no longer exists.
Q: It was a family business when you knew it?
A: I was a young boy when my father started, and he died when I was 11. So I never fully appreciated what he was, who he was, until I started working for the firm in 1974 as an investment banker. And it was really through the stories of people that knew him that I began to truly appreciate what he was as a person, how humble he was and what a great leader he was. And the values and ethics that he believed in that were carried forward to his successors. One of my great mentors was Dan Tully, who solidified the principles. Any time we
People (on Wall Street) have to be a little less arrogant, a little more humble. They have to relate to Main Street.
Winthrop H. Smith Jr.
came to a key decision, he’d look at the principles on the wall and he’d say: “Is this really in the client’s best interest? Is this something that we can read about on the front page of the tomorrow? ’Cause we have to act with integrity at all times.” And those values really guided us. They were our North Star and they guided us through the tough times as well as the good times.
Q: How have things changed?
A: The tone always starts at the top. I think that when a new CEO came in, who really didn’t take time to understand what Mother Merrill was and therefore didn’t appreciate what it was, he really took the firm in a very different direction. And he didn’t have that North Star that the former leaders did. Charlie Merrill for example, de-leveraged his clients before the crash of 1929. And we were always very careful about not taking on too much debt. We made a conscious decision to stay out of certain businesses that we weren’t good at. Ironically, one of them was mortgage securities. But we had a new CEO who didn’t take the time to understand the history, learn the culture. They really went in a different direction. That was one of the big problems.
That was one of the great opportunities that Charlie Merrill and my dad had in 1939. There are interesting parallels to today. The average American didn’t trust Wall Street. They didn’t feel they could invest. And they would get basically screwed by the fat cats. And it took bringing Wall Street to Main Street, educating the public, changing the way the business was done.
For instance, they took salesmen off of commissions and they put them on a salary and a bonus so they were on the same side of the table with the client. They took research away from investment banking and made it an independent element. They introduced the first training program so that people had to go through maybe a year or a year and a half of training before they could even become a salesman. And I think those steps, while they may have to be modified in today’s world slightly, really are the types of things that are needed to restore the average person’s confidence in Wall Street. Unfortunately, people today view Wall Street as the big fat-cat traders and not necessarily the person next door, in the Merrill Lynch or the Charles Schwab office who is a part of their community.
Q: But the number of products has changed, the way to invest has changed. Electronic trading, the fast traders, has also colored the picture.
A: Oh, it has. there’s so much information out there, and sometimes there’s so much misinformation. It can be very confusing, which is why I think the value of a good adviser is as important as it ever has been. And a good adviser can help get through the morass and get through all the irrelevancies, and help a person understand how to build a portfolio for the long-term. I personally think equities are still a great place to be if you take the long-term perspective and invest in quality.
Q: Do you think Wall Street and the banks will be able to get their reputations back?
A: Oh, sure. Remember when Charlie Merrill first came to Wall Street is 1907. That was the big banking crisis that was saved by J.P. Morgan. You know, you had the crash of ’29, you had the terrible period of the late ’ 60s and early ’70s. You had the peso and the Mexican crisis. There have always been periods of time where the customer has lost faith, sometimes for a decade. So yes, I think the right leadership and the right tone can restore confidence. But it’s gonna be a tough chasm right now.
Q: How do you get that tone back?
A: It starts with leadership of Wall Street and the leadership of the big banks. People have to be a little less arrogant, a little more humble. They have to relate to Main Street. I think they have to understand that some of the greed on Wall Street has been very harmful to the credibility of the Street.
Q: Where were the biggest mistakes made?
A: There were a lot of things. The leverage that they assumed in the 2007 and 2008 period of time was devastating. And I think you have to fault the regulators as well as the corporations; to have allowed the board of directors of Merrill Lynch to be leveraged 35, 36:1 was tragic. And for the SEC to have allowed that, and for the Federal Reserve to allow the banks that, in hindsight was a terrible mistake of judgment.