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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

May 20

Written by: Donald van Deventer
5/20/2011 5:08 AM 

Today’s blog focuses on the funding shortfall experienced by Merrill Lynch in 2008 and 2009. Like Countrywide, the nation’s largest U.S. mortgage lender at the time, Merrill Lynch’s situation provides a classic case study of a near-death liquidity crisis, even after the announcement of its acquisition by Bank of America.

This is the fourth case study in liquidity risk, following earlier blogs on AIG, Bank of America, and Countrywide Financial. 

This blog features the funding short-falls at Merrill Lynch during the credit crisis for the same very important reason that motivated our earlier blogs in this series: firms that have not had a “near death experience” are highly unlikely to be able to measure what would happen to them in a credit crisis using their own data alone.  As we will see in what follows, Merrill Lynch would probably not have survived without borrowings from the Federal Reserve. For this reason, in Kamakura’s KRIS default probability data base, Merrill Lynch is classified as a “failure” for default modeling purposes.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base.

The data used in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included. 

This blog entry lists the borrowing by Merrill Lynch that was identified by the Fed as “primary, secondary, or other extensions of credit” between February 8, 2008 and March 16, 2009.  Borrowings under this facility clearly represent a funding shortfall and an excellent measure of the degree to which liquidity was insufficient. A number of key events for Merrill Lynch are noted in this recent blog:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog,, May 13, 2011.

Key dates for Merrill Lynch are excerpted here:

June 20, 2007
Merrill Lynch seizes $850 million in assets from the two Bear Stearns hedge funds. Merrill tries to auction the bonds, but the auction fails
August 24, 2007
Bank of America buys $2 billion in Countrywide Financial preferred stock (Source:
October 5, 2007
Merrill Lynch writes down $5.5 billion in losses on subprime investments (source: Reuters)
October 18, 2007
Bank of America writes off $4 billion in losses (source: Bloomberg)
October 24, 2007
Merrill Lynch writes down $7.9 billion on subprime mortgages and related securities (source: Bloomberg,
October 30, 2007
Merrill Lynch CEO O’Neal fired (source: Reuters)
November 13, 2007
Bank of America says it will have to write off $3 billion in bad debt (Source:
January 11, 2008
Countrywide announces sale to Bank of America (Source: Levin report, page 47).
January 17, 2008
Merrill Lynch announces net loss of $7.8 billion for 2007 due to $14.1 billion in write-downs on investments related to subprime mortgages. (Source:
July 1, 2008
Countrywide acquisition closes (Source: Wall Street Journal)
July 29, 2008
Merrill Lynch sells $30.6 billion in CDOs for 22% of par value (Source: Reuters)
September 14, 2008
Lehman Brothers files for bankruptcy (Source: Reuters)
September 14, 2008
Bank of America announces acquisition of Merrill Lynch (Source: Reuters)
January 1, 2009
Bank of America merger with Merrill Lynch closes (source:

The primary, secondary, or other extensions of credit by the Federal Reserve to Countrywide during the period February 8, 2011 to March 16, 2009 can be summarized as follows:

Borrowing dates:
First borrowings March 10, 2008 but large borrowings began September 17, 2008 and continued with only a brief period of zero outstandings through March 16, 2009, well after the January 1, 2009 closing of the acquisition of Merrill Lynch by Bank of America
Average from
2/8/2008 to 3/16/2009
$7.6 billion
Average when Drawn
$16.2 billion
Maximum Drawn
$39.96 billion
Number of Days
With Borrowings
190 days

Kamakura Risk Information Services version 5.0 Jarrow-Chava default risk models showed a cumulative 5 year default probability for Merrill Lynch of 10.62% on September 12, 2008, the last business day before the announcement of the acquisition of Merrill Lynch by Bank of America. 

By the close of the acquisition on January 1, 2009, Merrill Lynch’s 5 year cumulative default risk was 9.07%, a decline from a peak about one month prior to the closing of the merger:

The borrowings from the Federal Reserve start in very large volume on September 17, 2008 with an initial borrowing of $4.7 billion, indicating that (even after the September 14 announcement of the acquisition by Bank of America) Merrill could no longer fund itself completely. Borrowing from the Fed peaked at $39.96 billion in early October and declined only gradually, finally dropping below $10 billion on February 5, 2009, one month and 4 days after the close of the acquisition by Bank of America. Merrill Lynch received a $10 billion injection of capital under the Troubled Asset Relief Program’s Capital Purchase Program in October, 2008. Clearly even after the September 14 merger announcement, Merrill Lynch was in a highly precarious situation as the graph of large borrowings shows:

In addition to these borrowings (“primary, secondary or other extensions of credit” from the Federal Reserve), Bank of America sought support from the Commercial Paper Funding Facility run by the Federal Reserve on one occasion, and the same was true for Merrill Lynch, which borrowed $7.96 billion in 3 month commercial paper from the Commercial Paper Funding Facility:

Implications of Funding Shortfall Data

The sports truism that “it ain’t over until the fat lady sings” was just as true in the case of Merrill Lynch as it was in the case of Countrywide.  Both the KRIS default probabilities for Merrill Lynch and the need to borrow as much as $39.96 billion from the Federal Reserve AFTER the acquisition of Merrill Lynch was announced show that Merrill Lynch barely escaped failure.  In our next study of liquidity risk, we turn to the combined borrowings of Bank of America, Merrill Lynch, and Countrywide.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
May 20, 2011

© Copyright 2011 by Donald R. van Deventer. All Rights Reserved.