In 1994, Orange County, California made national news when it became the first county in the nation to file for bankruptcy protection under Chapter 11 of the Bankruptcy Code. This conservative and affluent California county, better known for Disneyland and the John Birch Society than for its interest in high finance, found that its investments had not performed as expected, and that the county was unable to meet its financial obligations. Because county bonds are sold throughout the country (and even the world), and because there were extremely large sums involved, the story captured national media attention. As events unfolded, the brokerage house which advised and handled the county's transactions, Merrill Lynch, became inextricably caught up in the situation. Accusations flew in the press from both sides about the level of responsibility that either side should accept, and lawsuits have been filed by the county, and others interested in the situation, against Merrill Lynch. This research explores the role that Merrill Lynch played in the Orange County bankruptcy, and considers what action the company should take at this point.
Charles Merrill, a bond salesman, opened an underwriting firm in 1914 and hired his friend Edmund Lynch as partner shortly afterwards. In the 1920s, the new firm pursued the small investor by emphasizing personal service. The company also took a lead in financing supermarkets that were providing consumers with more service and variety. In 1930, the company sold its retail business to Wall Street's largest brokerage firm, E. A. Pierce, and survived the Depression as an investment banking firm. Merrill Lynch reacquired the retail business in a 1940 merger with Pierce, and the next year the company merged with Fenner and Beane; Winthrop Smith, an employee transferred to Pierce in 1930, became a partner in 1958 and the company's name grew to Merrill Lynch Pierce Fenner and Smith.
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