Merrill Lynch s CMA: Deception

Anecdotal evidence indicates that Merrill Lynch employed deceptive measures to deter competition from other securities firms when it introduced the cash management account (CMA) in the late 1970s.

The CMA was an innovative all-purpose money management account that offered a brokerage account, money market fund, checking account, and credit card. The CMA infringed on activities traditionally reserved for commercial banks, and because it offered an interest rate of 12.5 percent, compared with the 5.0 to 5.5 percent that regulations allowed banks to offer on traditional savings accounts at the time, Merrill Lynch seized considerable market share from retail and commercial banks.

The banks retaliated with numerous lawsuits alleging violation of the Glass-Steagall Act. A commercial banking group filed the first of many lawsuits almost immediately after Merrill Lynch advertised the CMA in a Denver newspaper. Shortly thereafter, commercial banking leaders called for organized opposition at the national level, and the state of Utah tried unsuccessfully in 1981 to prohibit the CMA. Even the chairman of the Federal Reserve, Arthur Burns, expressed skepticism about the legality of the CMA.

Viewing this controversy as an opportunity to deceive would-be competitors as to the actual attractiveness of the CMA market, Merrill Lynch deliberately drew media attention to the lawsuits. On the surface this was a seemingly reckless move. But Merrill Lynch knew that the likelihood of an unfavorable ruling was low, because the CMA had been designed specifically not to violate federal securities laws. Merrill Lynch also correctly surmised that rival brokerage firms were unlikely to devote the time, effort, and expense necessary to follow the outcomes of each and every lawsuit and that rivals were even less likely to invest in systems for competing products as long as the CMA s legality was in question.

While the trials and tribulations of its experiences with the CMA received considerable coverage, Merrill Lynch barely mentioned the fact that it never lost even one of these lawsuits. This selective communication of information created a taint of litigation and helped deter would-be competitors from offering similar products and gave the company a five-year lead in the lucrative CMA market. Citing the launch of the CMA as one of the most noteworthy U.S. business events in the twentieth century, the Wall Street Journal noted, By the time other brokerage firms caught on in 1982, Merrill Lynch had sold 533,000 CMAs with assets of $32 billion. ^[17]

Leadership Lessons

Merrill Lynch cunningly used the media as a means to capitalize on its rivals reluctance to undertake the costly process of gathering their own firsthand information. Rivals assumed the media to be an accurate and unbiased source of information, and Merrill Lynch used selective release of entire accurate reports through this reliable source to convey to competitors the information that it wanted them to see and hear. While Merrill Lynch never explicitly released incorrect information or explicitly misrepresented inflated estimates of the cost of the CMA development or its assessment of the likelihood that the product would ultimately survive judicial review, it also never corrected a competitor s estimate of costs, if too high, or probability of success, if too low. These tactics, along with the negative light cast on the CMA by the coverage of the lawsuits, lulled its rivals into believing that development of their own CMA offerings was not optimal and thus protected the lucrative opportunity that Merrill Lynch had created.

^[17] Centennial Journal: 100 Years in Business ”Merrill Lynch CMAs Draw Interest, 1977, Wall Street Journal , November 3, 1989.