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What Goes Up
By Eric J. Weiner Little, Brown and Company Copyright © 2005 Eric J. Weiner
All right reserved. ISBN: 978-0-316-92966-0
Chapter One GOOD TIME CHARLIE
If you had to name the one person in the last hundred years who was most responsible for bringing individual investors to Wall Street, your list of candidates would have to begin with Charlie Merrill. Merrill and his firm, Merrill Lynch, probably did more than anyone to sell the stock market to America in the first half of the twentieth century. Considering Wall Street's traditional insular culture, it's hardly surprising that its first great democratizer was a true outsider. Merrill had none of the family connections and breeding that defined the upper crust of the financial world. His background was in grocery stores, and he brought many of those retail concepts to Wall Street through Merrill Lynch.
Charlie Merrill and his partner, Edmund Lynch, formed Merrill Lynch in 1914. They made a fortune for themselves and their customers through the Roaring Twenties by investing in the chain stores, like Safeway and McCrory, that were sprouting up around the country. These were the growth stocks of the day, and they were shunned by Wall Street's old guard, as personified by Morgan Stanley and Kuhn Loeb. But Merrill and Lynch didn't care. They kept on pitching stocks that others ignored and built a fairly substantial business with branches in Chicago, Detroit, and Los Angeles connected to the home office on Wall Street through a Teletype wire. Things were looking good.
But then, in 1928, Charlie Merrill became pessimistic about the stock market and his business. And here's where his story really begins.
EDWIN PERKINS (financial historian and author of Wall Street to Main Street: Charlie Merrill and Middle Class Investors):
In March of 1928, Charlie Merrill started to have some serious doubts about the market. He sent out letters to his customers telling how he felt. Of course, the people he had the hardest time convincing were Eddie Lynch and his partners. They thought it was one of those "new eras," like we heard about not too long ago. But Merrill got quite cautious and he sent letters to all their customers, not necessarily saying sell, but saying that now might not be a great time to be buying stocks on margin [with borrowed money]. And he urged the people with margin accounts to sell off some of their securities and pay off their debts.
CHARLIE MERRILL (cofounder and former chairman of Merrill Lynch and Company):
The advice we have given important corporations can be followed to advantage by all classes of investors. We do not urge that you sell securities indiscriminately, but we do advise, in no uncertain terms, that you lighten your obligations, or better still, pay them off entirely. Many fine reputations have been built up in this era of extraordinary prosperity, which will not stand the acid test when troublesome times are here. Take advantage of the present high prices and put your own financial house in order.
EDWIN PERKINS:
That was his feeling in early 1928. By 1929, he became even more convinced that this was true. In his letters he would quite often cite reports coming out of the Federal Reserve Bank saying that things were getting a little exuberant, sort of like when [Fed chairman Alan] Greenspan said that there was "irrational exuberance" in the market in the 1990s. I think Merrill was saying the same thing in 1929. He took it to heart. But the rest of his partners did not. At one point in 1929, Lynch went on vacation in Europe and gave Merrill power of attorney over his stocks, and Merrill sold every single one of them. Lynch wasn't happy about that at all, but later it turned out he was lucky that Merrill did that.
After the crash, Charlie Merrill and Eddie Lynch decided to downscale. Lynch was pretty certain he was ready to cash in his chips. He pretty much dropped out entirely. In the meantime, they sold their retail business, the branches that existed, to E. A. Pierce, which was around as sort of a regional brokerage chain. But it wasn't a total sale, because Merrill Lynch invested a million or so dollars in that firm. They, in a sense, became silent partners. And they kept the Merrill Lynch office on a skeleton staff in New York. They didn't look for new business, but when any of the bonds from the old business came through and needed to be financed, they'd handle it. There wasn't much business, but that's the way it was for the rest of Wall Street in the 1930s. Charlie, meanwhile, continued as a private investor, but he really focused most of his attention on Safeway and the chain stores he owned.
ROBERT NEWBURGER (executive director of the New York Stock Exchange Alliance of Floor Brokers and member of the exchange since 1940):
When I came to Wall Street [in 1933] Merrill Lynch was E. A. Pierce and Company. Ed Pierce had the office at 40 Wall Street, and E. A. Pierce had more branch offices than anyone else, about five more than Bache and Company. Both of them had their main offices at 40 Wall Street, oddly enough. Ed Pierce came to work at about six o'clock every morning and stayed there until late at night. He was a real shirtsleeve fellow, and he built up quite a business.
EDWIN PERKINS:
Like many other brokerage houses on Wall Street, E. A. Pierce fell on hard times through the 1930s. By 1939 it was facing dissolution. Pierce and Win Smith [a former Merrill Lynch executive who went to E. A. Pierce] were looking around to see who they could merge with. What Smith decided to do was try to convince Merrill to come back into the business. He showed him how with certain economies of scale here and there the company could be salvaged.
ROBERT MAGOWAN (former Merrill Lynch executive and Charlie Merrill's son-in-law):
Merrill was getting bored about 1940 after sitting on his ass for ten years. It looked like an opportunity, the only one left, and he had all the money.
EDWIN PERKINS:
The other thing I think that might've helped that decision was the death of Eddie Lynch. He died in 1938. And Lynch and Merrill had had some conflicts in the twenties and Merrill wasn't too eager to go through that again. But Smith convinced Merrill that if he could come in and put up some money, he could be the single senior partner. He could make all the major strategic decisions. That appealed to Merrill. So he decided to come back into the business in 1940. You really could say that the modern era of Wall Street began right there.
WINTHROP SMITH JR. (former Merrill Lynch executive vice president and son of former chairman Winthrop Smith Sr.):
To be successful in business you have to realize that a great time to do something often is when nobody else thinks it's a great time. The contrarian usually is a step ahead. When you look at this industry back then, nobody wanted to get in and a lot of people wanted to get out. The world looked terrible in 1939. We hadn't really emerged yet from the Depression and Europe was at war. Why would you want to take a risk at that time?
JOE NOCERA (financial journalist and author of A Piece of the Action):
Win Smith said, "The firm is about to fold. Please come and save it." That's the perfect kind of appeal to a guy like Charlie Merrill because being the savior and the center of attention is exactly what he craved.
WINTHROP SMITH JR.:
It really did take Merrill a while to warm to the concept. A fellow by the name of Ted Braun was very important in all this. He was a consultant who had worked with Merrill in California during his Safeway days and ended up being a consultant to Nelson Rockefeller and others. Braun did some market research that convinced Merrill-and reinforced my father's conviction-that out of the adversity that was happening there was a real opportunity to do something different.
JOE NOCERA:
What made Charlie Merrill different from the rest of his contemporaries on Wall Street was, he had a populist instinct. That's what he brought to the table right from the start. Charlie Merrill did not grow up wealthy. He was a poor boy, basically. He had to drop out of college for a while because his father was this sort of itinerant doctor who went broke. So he had to go out and make some money to pay for classes. Through a variety of circumstances he ended up on Wall Street basically as a kid. And even though he evolved into this extremely rich and powerful financier, he always stressed that the little guy could do this too, which was a foreign notion in the early part of the twentieth century.
DONALD REGAN (former Merrill Lynch chairman, treasury secretary, and White House chief of staff):
How do you take the mystery out of finance? How can you explain this business to somebody else so the curtain parts for him, too? "Take the mystery out of finance!" It's what Merrill kept advocating.
JAMES MERRILL (poet, author, and son of Charlie Merrill):
My father despised secrecy. Demystification had been the key to his own great success: no more mumbo jumbo from Harvard men in paneled rooms; let the stock market's workings henceforth be intelligible even to the small investor.
WINTHROP SMITH JR.:
There was a famous Roper Survey in 1939 that showed most people in this country thought livestock was traded on the New York Stock Exchange, not stocks and bonds. In fact, most people didn't know the difference between a stock and a bond. There was a real lack of information. And the truth is, until the SEC [Securities and Exchange Commission] was formed in 1933 the little guy didn't get a break.
There wasn't a transparent system. There wasn't a system of checks and balances. You had poor understanding and frankly not a good environment for the individual to participate. You also had Wall Street firms that were run very poorly and very unprofitably. But even though times were tough, Charlie Merrill could see that there would be a great need to recapitalize the United States in the near future to fuel the coming growth after the war. The individual investor could be a fundamental part of that growth. But what was needed was education. People were going to have to understand how to invest. There was going to have to be a different approach. The clients' interests had to be served, not the firm's interests, or this would never work.
There also was an understanding that firms were going to have to be run differently. A lot of the principles Charlie Merrill learned from Safeway and the chain stores were brought to Merrill Lynch. It's a high-volume, low-margin business that has to be run like a business, not a club. If you looked at a lot of the Wall Street firms in 1940, like J. P. Morgan, they operated in palaces with mahogany walls and stuffed leather sofas. Merrill said most of the business is done by telephone so you don't need mahogany walls and leather sofas. You had to run the business efficiently. The whole idea of sales per square foot was a merchandising principle that Charlie brought to this firm. The other thing was advertising, which Wall Street firms never did. Charlie brought advertising to Wall Street. He did everything from print advertising to sending people out across the country in wagons and setting up shop in places like Williamsport, Pennsylvania.
DONALD REGAN:
Charlie Merrill was against the establishment on Wall Street from the time he started. Remember that Merrill and Eddie Lynch originally were known as "the boy bandits" of Wall Street. Why? Because they cut prices, did things differently than anyone else. They went after the chain stores for business. It may seem funny now, but chain stores were controversial back then. I remember in my high school days at Cambridge Latin in the 1930s one of the major topics of the debating team was: "Resolved: Chain Stores Should Be Abolished." Individual towns couldn't stand having a major store-a Kroger or Safeway or A&P-on Main Street.
But this was Merrill's background. He backed J. C. Penney. He backed Newbury. He was a good friend of Frank Woolworth. When he came back to Wall Street in 1940, after he left in '29, he wanted to do the same thing at Merrill Lynch that he did at Safeway.
EDWIN PERKINS:
Merrill had all this experience from the chain stores that he invested in. So on a strategic basis, he decided to apply some of the lessons he learned from the retail business to what he was doing on Wall Street. He took his salesmen off commissions and paid them a salary, which was revolutionary. He said the interests of the customer MUST come first, with MUST in capital letters. And when he looked at it, the first thing he really had to do was educate his customer.
CHARLIE MERRILL:
It was probably the biggest job of mass education that's ever confronted any business at any time in the history of this country.
JOE NOCERA:
It wasn't just that Charlie Merrill's ideas permeated the firm. His whole larger-than-life personality dominated the place. Charlie Merrill was the sort of person who had to be at the center of any room he entered. He was a small man but he dominated a conversation, expecting you to hang on his every word. He also wanted you to accept his word as the received wisdom from the gods. He was a fabled womanizer and a remote figure to his children. Like many driven, successful people he was a mass of contradictions, ornery but generous, that kind of thing. He loved to party and drink, consuming huge quantities of martinis as he spun his stories. And he was that way from the very beginning. He met his partner Eddie Lynch because the two of them liked to crash debutante parties together when they were young men.
DONALD REGAN:
Charlie Merrill was a great ladies' man. He had four wives and about sixteen mistresses. And he was a great bridge player. He could be very disarming. Small in stature-I don't think he stood taller than five foot seven-white hair and soft complexion. He had sort of a droll sense of humor. He was quiet and very soft-spoken with a gentle southern accent. But he had a hell of a temper. Rub the guy the wrong way and you saw the fur fly. And Charlie had a will of iron. There was one way of doing things-his way or no way.
WINTHROP SMITH JR.:
I was really young when I met Charlie Merrill, maybe six or seven. I remember that even though he was a small man in size he actually was a very large person when you met him. He had this enormous personality. Even at that young age I could see that he was a very colorful character, completely different from any of my father's other friends. I remember he had this great smile and a way of carrying himself that drew you to him. My father, on the other hand, was a New England Yankee, very unassuming, very modest, very unpretentious. He was quite the opposite of Charlie. But I think those opposing traits helped cement their relationship as it developed. In some ways they were the better parts of each other.
DONALD REGAN:
After Merrill had his first heart attack in 1944 he basically retreated from running the firm full-time. In those days heart attacks were much more serious than they are today, so he had to quiet down, be the guy who operated from a distance. He'd come to the office seldom but he always knew what was going on. Win became his eyes and ears at the firm. The relationship was symbiotic and worked extremely well. Merrill was the idea man while Win's job was execution.
WILLIAM SCHREYER (former Merrill Lynch chairman):
Mr. Merrill had all the externals, a genius and all that. Mr. Smith was a guy who could analyze things, didn't shoot from the hip. He was very thoughtful and made good decisions. By the end Mr. Merrill had such bad heart disease that he very rarely came into the office. Mr. Smith was the guy that made things happen, beautifully.
LOUIS ENGEL (Merrill Lynch's first advertising director):
Win Smith was the only man who, after Charlie Merrill had his heart attack, could have held this thing together. He was an incredible man. He was absolutely one of the most quiet, unassuming men you've ever met in your life. In those early days the partners came from all these different firms. They still had their old ties, their old loyalties, and their particular buddies down the hall. But it was Win Smith who welded this thing together and made it one organization.
WINTHROP SMITH SR. (former chairman of Merrill Lynch):
In some ways Charlie's absence was an advantage. He had a better perspective on what was happening to the business as a whole, and to our firm in particular, than he might have had had he been actually participating in the day-to-day events. (Continues...)
Excerpted from What Goes Up by Eric J. Weiner Copyright © 2005 by Eric J. Weiner. Excerpted by permission.
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