How Community Bankers Accidentally Destroyed Merrill Lynch's Money Machine
The regulatory rebellion that democratized integrated financial services
By 1985, Merrill Lynch looked unstoppable. Over a million customers. $100 billion in assets. Patent protection generating millions in licensing fees. Competitors literally paying tribute to copy their innovation.
But Thomas Chrystie, watching his Cash Management Account dominate the industry, was starting to see storm clouds. The same regulatory structure that created the CMA opportunity was beginning to crack. And when it shattered, it would democratize integrated financial services in ways that made Merrill's advantage look quaint.
The revolution wasn't coming from Silicon Valley. It was coming from an unlikely alliance of small-town bankers who were tired of losing their best customers to a brokerage firm hundreds of miles away.
The Bankers' Rebellion
October 1981. Over 3,000 banking executives gather in Boston for the American Bankers Association convention, but the mood is anything but celebratory. In just four years since the CMA launch, commercial banks have lost over $50 billion in deposits to money market funds.
Robert Clarke, comptroller of a mid-sized Ohio bank, captures the frustration: "We're losing our best customers not because we can't serve them well, but because Congress won't let us pay them what their money is worth. When a farmer can earn 12% at Merrill Lynch and we're capped at 5.25%, we're not competing on service. We're competing with one hand tied behind our back."
The banking lobby's response is coordinated and devastating. Economic studies showing "massive disintermediation." Letter-writing campaigns from small-town mayors. Congressional meetings with affected bankers.
Their argument is elegantly simple: eliminate the regulations creating these distortions, or watch community banking collapse.
The 1980 Compromise That Changed Everything
March 31, 1980. President Carter signs legislation that will accidentally trigger the most dramatic transformation of American finance since the New Deal. The Depository Institutions Deregulation Act phases out Regulation Q over six years, but includes a crucial intermediate step.
Starting December 14, 1982, banks can offer "money market deposit accounts" with no interest rate ceilings and FDIC insurance—something money market funds can't provide.
For the first time since 1977, Merrill Lynch faces genuine competition for yield-conscious customers.
The MMDA Earthquake
December 14, 1982. Banks launch money market deposit accounts with iPhone-release-level fanfare. "Earn Money Market Rates With FDIC Insurance!" "Beat Merrill Lynch With Your Local Bank!"
The response is overwhelming. First week: $8 billion in deposits. Six months: over $200 billion.
But something unexpected happens. Instead of simply moving money back to banks, customers start splitting assets between institutions based on specific needs. They keep some money in MMDAs for safety, some in money market funds for higher yields, and some in CMAs for integrated services.
The result? A more sophisticated customer base that understands they can optimize across multiple providers—education that will prove crucial for fintech's eventual emergence.
The Domino Effect
What follows reshapes American finance:
Insurance companies acquire brokerages (Prudential-Bache). Credit unions offer investment services. Mutual fund companies launch integrated accounts (Fidelity's Ultra Service Account, Schwab One). Even retailers enter the game (Sears Discover card).
The regulatory barriers that created distinct industries collapse. Every financial institution begins trying to become every other financial institution.
The Glass-Steagall Death Blow
November 12, 1999. President Clinton signs Gramm-Leach-Bliley, formally ending Glass-Steagall's separation of banking and investment services.
The irony is perfect: by proving customers wanted integrated financial services, Merrill Lynch created demand that traditional regulatory structures couldn't efficiently satisfy. The solution wasn't restoring old barriers—it was eliminating remaining restrictions.
Within weeks, merger announcements reshape the landscape. Citigroup. JPMorgan Chase. Eventually, Bank of America acquires Merrill Lynch itself in 2008.
The Unintended Revolution
The concept Merrill Lynch pioneered as competitive advantage becomes basic expectation for any serious financial services provider. But this democratization contains the seeds of its own disruption.
Large institutions created through consolidation become complex and slow to innovate. Legacy systems produce experiences that are integrated in name but fragmented in practice. Fee structures optimized for institutional profit create opportunities for new entrants.
When internet and smartphone technology mature, entrepreneurs realize they can offer more integrated, customer-friendly experiences than established institutions burdened by legacy systems.
The cycle continues. Fintech companies find new seams between traditional services and technology capabilities, proving that the principles underlying the CMA's success remain as relevant as ever.
Want the complete story? Including the detailed regulatory battles, the S&L crisis acceleration, the international competition pressures, and how this sets the stage for fintech's emergence, read my full analysis here.
What regulatory walls do you see crumbling in today's financial services?