This could have been the worst of times for Merrill Lynch & Co.
Its longtime client Orange County lost $1.7 billion in bad investments and pinned the blame on Merrill in a highly publicized lawsuit. Top executives were subpoenaed to appear before California lawmakers, who excoriated them, even as federal regulators scrutinized the Wall Street giant's financial dealings with the county treasurer.
With skillful damage control, however, Merrill has managed so far to shrug off the nation's largest municipal bankruptcy and has rolled on to post some of the highest profits in its lengthy history.
To be sure, the firm worked hard to protect its reputation.
It hired a major California lobbying firm, flew out New York executives to hand-hold local customers, tapped veteran spin-control experts and compiled a 100-page booklet for clients called "Setting the Record Straight."
Merrill's bottom line has remained Teflon-coated:
* The company is expected to earn about $1 billion in 1995, more than any other brokerage firm and its third straight year of 10-figure net income. This year should be the second most profitable in Merrill's history.
* Merrill hasn't been blackballed in the halls of California local government. It is still the largest underwriter of municipal bonds in the state, with $3 billion sold this year. Aggressive, low-ball pricing has been key.
* Except for those directly connected with Orange County, Merrill seemingly hasn't lost a major municipal client in California since the bankruptcy. Some cities here, including one as important and lucrative as Anaheim, continue to use Merrill to sell securities. Local companies continue to pick Merrill to sell their stock on Wall Street.
* Merrill's stock price has more than recovered from its initial drop, nearly doubling since to $55.13 a share.
Stock market conditions helped, of course, as Merrill caught the same profit wave boosting most investment banking and securities firms this year. But Merrill is riding a little higher than the rest.
"The environment in 1995 has been very kind to Merrill Lynch," said Haig Nargesian, a senior analyst at Moody's Investors Service Inc. in New York. "The main concern was whether customers would shy away from them because of Orange County. That hasn't happened."
Even so, Merrill faces some serious threats. After paying its half of a $24-million settlement in a highly-publicized Massachusetts municipal bond scandal, New York turned around last week and suspended the firm from a key leadership position in raising money for the city. Orange County is seeking $2 billion in a lawsuit against Merrill, and a judge on Friday allowed the lawsuit to proceed, a major setback for Merrill.
Calvert D. Crary, a longtime litigation analyst, predicts Merrill will be held "responsible to some extent for the losses" and will probably pay a settlement in the range of $500 million to $1 billion. Even that, according to one of his reports, could be done "without severe disruption of business" to Merrill.
As dismaying as Merrill's prosperity may be to some, it provides some comfort to others.
"I'm pleased," said William J. Popejoy, the county's former chief executive, "because as a resident of Orange County, I'd hate to think we were suing someone who didn't have the ability to pay."
With roots more than 100 years deep, Merrill is a global powerhouse, a one-stop shop of high finance. Earning one-fifth of its revenue overseas, Merrill has 44,000 employees in 31 countries.
Armed with its extensive network of retail brokers that serves both individuals and companies, Merrill is the largest custodian of individual assets in the world, holding $675 billion for its individual clients, an increase of 18% from last year.
Merrill has remained the leading underwriter of corporate debt worldwide with a 18.2% market share during the first 11 months of this year, according to Securities Data Co., a research firm in New Jersey.
And in the year since Orange County's Dec. 6 bankruptcy filing, Merrill remains the 600-pound gorilla in the business of selling and trading bonds that finance America's local governments.
One of its biggest clients was Orange County, where the firm underwrote major bond deals, lent the county money to leverage its investment pool and sold it many of the riskiest investments in its portfolio. The business was lucrative; in just 1993 and 1994, Merrill said, it earned $62.4 million in fees.
The once-sleepy and secretive municipal bond arena has posed the greatest troubles for Merrill this year, even beyond the borders of Orange County.
Merrill and Lazard Freres & Co. agreed in October to pay more than $24 million to settle civil charges that they defrauded four public agencies in Massachusetts. It was the largest settlement in the history of the bond market.
Because of the Massachusetts settlement, New York City said last week it would limit Merrill's role in its municipal underwriting, suspending the firm from its top-notch position until next summer.