The Merrill Lynch Model

The Merrill Lynch model, also known as the independent investing bank model, is exemplified by Merrill Lynch and adopted by Merrill Lynch, Morgan Stanley, and Goldman Sachs.

Under this model, investment banks are independent market entities. Most cases are specialized in, or at least mainly focused on, the investment banking business. They are characterized by a high level of interindustry specialization, outstanding credit and reputation, and relatively less involvement in commercial banking. Institutions following the independent investment bank model mainly engage in securities issuance and underwriting, securities brokerage and proprietary business, M&A counseling, fund management, venture capital investment, and credit and debt securitization. They are the major market makers in the U.S. securities market and serve the institutional investors in the U.S. financial market, together with mutual funds and insurance companies. Because they are not commercial banks in their own right, most of these companies chip away at the territory of commercial banks through "financial innovation."

In the early twenty-first century, the capital market departments of investment banks such as Merrill Lynch Securities started making a significantly bigger contribution to the total revenue, as the percentage of the proprietary business rose remarkably. It was the derivative trading that would, in the future, lead investment banks to dire straits, and even closure. Before the outbreak of the subprime mortgage crisis in 2007, mergers and acquisitions among investment banks were mainly used for the purpose of business expansion. Such types of M&As included the acquisition of First Boston by Credit Suisse, the merger of Salomon Smith Barney and Travelers Group into Citigroup, the acquisition of Bankers Trust by Deutsche Bank, and the merger of Warburg into Union Bank of Switzerland.

In 2008, the five largest investment banks in the United States found themselves at the center of the financial crisis. They were forced to go bankrupt or restructure under the pressure of a large amount of debt and a high leverage rate. In March 2008, the fifth-largest investment bank in the United States, Bear Stearns, was on the brink of bankruptcy and was acquired by J.P. Morgan. In September 2008, the fourth-largest investment bank in the United States, Lehman Brothers, announced its bankruptcy, which launched the subprime mortgage situation into a complete international crisis. Merrill Lynch was then acquired by Bank of America. Goldman Sachs and Morgan Stanley ended up as the only two survivors of the five giant investment banks.

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