Merrill Lynch & Orange County Bankruptcy
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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
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eir favor, sells the derivative on the open market. So long as prediction is correct, the company's resources are not harmed. However, when the indicator moves the wrong direction, the company is faced with a severe financial drain, particularly if the company leveraged its position (borrowed against the perceived proceeds of the derivative) for its purchase.
Once the derivatives move into the secondary market (options and futures), they cease to be purely hedging devices and become much more speculative. Instead of an agreement between two companies who clearly understand the position the other is in, the derivatives become more complex; investors can depend on intermediaries, such as investment bankers, to handle the transactions, and may be entirely unaware of the companies which ultimately spawned the contracts in question. By the time the final analysis is performed on these transactions, they amount to little more than speculation as to which direction the indicators will go, a dangerous situation with the potential for large gains, but also devastating losses.
Another item of note is that derivative contracts are "off balance sheet" items, meaning that they obscure the level to which the company has leveraged its pos
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Some common words found in the essay are:
Merrill Lynch, Orange County, Derivatives Fundamentally, Southern California, Birch Society, merrill lynch, Edmund Lynch, Merrill Lynch's, Lynch NYSE, Robert Citron, orange county, Fenner Smith, derivative contracts, derivative securities, county bankruptcy, southern california, investment banking, merrill lynch's, orange county bankruptcy, company leveraged position, company introduced, bankruptcy orange county, investment community, alternatives merrill lynch, secondary market options,
Approximate Word count = 2437
Approximate Pages = 10 (250 words per page)
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