merrill lynch case

8/8/2019 Merrill Lynch Case

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MerrillMerrill LynchLynch

PRESENTATION OF THEPRESENTATION OF THECASECASE


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Istorijat Merrill LynchIstorijat Merrill Lynch--a:a:

-- foundedfounded 66thth JJanuaanuaryry 19141914..

-- foundersfounders: Charles E. Merrill i Edmund C.: Charles E. Merrill i Edmund C.LynchLynch

-- headquartersheadquarters: New York City, USA: New York City, USA

-- employeesemployees (2008): 60.000(2008): 60.000

-- provides: capital markets services,provides: capital markets services,

investment bankings and advisoryinvestment bankings and advisoryservices, asset management, insurance,services, asset management, insurance,banking and related financial servicesbanking and related financial servicesworldwideworldwide ......


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Subrime MortgageSubrime MortgageSubrime mortgagesSubrime mortgages are nonare non--conforming orconforming ornonnon--standard home loans made to borrowersstandard home loans made to borrowerswho did not qualify for standard prime (market)who did not qualify for standard prime (market)interest rates.interest rates.

Characteristics of those borrowers:Characteristics of those borrowers:

-- they had poor or week credit historiesthey had poor or week credit histories

-- they applied for highthey applied for high--value loan to financevalue loan to finance

mortgagesmortgages-- they had high debtthey had high debt--toto--income ratiosincome ratios

-- they could not provide sufficient documentationthey could not provide sufficient documentationto support their applicationto support their application


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Subrime MortgageSubrime Mortgage

-- Subrime mortgage lending was first madeSubrime mortgage lending was first madepossible in the US in 1980s, lenders werepossible in the US in 1980s, lenders were

allowed to charge high interest rates toallowed to charge high interest rates toborrowers who posed elevated credit riskborrowers who posed elevated credit risk

-- In the 1990s intense competition in theIn the 1990s intense competition in theprime market and the advent ofprime market and the advent of

securitisation led to the proliferation ofsecuritisation led to the proliferation ofsubrime mortgages in the USsubrime mortgages in the US


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CDOsCDOs

(collateralised debt obligations)(collateralised debt obligations)-- CDOs are packaged loans with a high risk,CDOs are packaged loans with a high risk,with rights to mortgage payments andwith rights to mortgage payments andrelated credit risks transfered from theirrelated credit risks transfered from their

originators to investors most willing to bearoriginators to investors most willing to bearthem;them;

-- the underlying assets and related cashflowthe underlying assets and related cashflow

would serve as collateral for investors;would serve as collateral for investors;-- CDOs are devided into three layers: safeCDOs are devided into three layers: safe(AAA), okay (BBB) and risky (unrated)(AAA), okay (BBB) and risky (unrated)


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Stanley OStanley ONeal eraNeal era

-- CEO of Merrill Lynch from DecemberCEO of Merrill Lynch from December2002.2002.

-- cutting costs and riskier businessescutting costs and riskier businesses

-- In 2003. hired Christopher Ricciardi anIn 2003. hired Christopher Ricciardi anexpert in CDOsexpert in CDOs

-- within two years Merrill Lynch became thewithin two years Merrill Lynch became thenumber one player in CDOs market withnumber one player in CDOs market with

US$19 billion worth of CDOs dealsUS$19 billion worth of CDOs deals-- one of Wall Streetone of Wall Streets highest paids highest paid

executives with annual remuneration ofexecutives with annual remuneration ofUS$91 millionUS$91 million


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Market turnoverMarket turnover

-- in 2005 interest rates regained ground soin 2005 interest rates regained ground somany homeowners who took out interestmany homeowners who took out interest--only adjustableonly adjustable--rate mortgages could notrate mortgages could notafford monthly payments with higher ratesafford monthly payments with higher rates

-- housing prices deceleratedhousing prices decelerated

-- In mid 2007, many US homeowners beganIn mid 2007, many US homeowners beganto default on their mortgagesto default on their mortgages


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FairFair--value or mark to marketvalue or mark to market

-- based on these accounting rulesbased on these accounting rulessignificant losses and gains have to besignificant losses and gains have to berecognisedrecognised

-- Fair value accounting rules were aimed toFair value accounting rules were aimed toenhnace transparency and increase theenhnace transparency and increase thelevel of disclosure so that investors couldlevel of disclosure so that investors could

be provided with precise and timelybe provided with precise and timelyfinancial reportsfinancial reports


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The Fall of CDOsThe Fall of CDOs

-- at the end of 2005 American Internationalat the end of 2005 American InternationalGroup Inc. stopped insuring subrimeGroup Inc. stopped insuring subrimebacked securitiesbacked securities

-- in mid 2007 most mortgagein mid 2007 most mortgage--backedbackedsecurities were affected at once becausesecurities were affected at once becausethey were highly correlatedthey were highly correlated


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WriteWrite--down of CDOsdown of CDOs

-- At the end of third quarter of 2007 a monthAt the end of third quarter of 2007 a monthaway, Oaway, ONeal and the BoD were facing aNeal and the BoD were facing ahefty writehefty write--down of CDOsdown of CDOs

-- Under mark to market accounting rulesUnder mark to market accounting rulesMerril Lynch had to value its CDOMerril Lynch had to value its CDOinventory and to recognise gains or lossesinventory and to recognise gains or losses

in its financial statements according to thein its financial statements according to thedifferent categories of the asset classesdifferent categories of the asset classes


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WriteWrite--down of CDOsdown of CDOs

-- in October 2007, ONeal was prepared toin October 2007, ONeal was prepared toannounce an embarrassing writeannounce an embarrassing write--downdown

-- in November 2007, ONeal left thein November 2007, ONeal left theComapany with US$2.24 billion inComapany with US$2.24 billion inunexpected lossesunexpected losses

-- John Thain succeeded him. The CompanyJohn Thain succeeded him. The Company

continuous to report losses until it wascontinuous to report losses until it wasannounced their acquisition by Bank ofannounced their acquisition by Bank ofAmerica, on September 2008America, on September 2008


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Thank you for being patientThank you for being patient

merrill lynch case

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