When Merrill Lynch Broke Banking (With a Patent)
How a brokerage firm accidentally invented the blueprint every fintech is copying today
I've been obsessed with the Cash Management Account since I worked at Merrill Lynch as an intern in 2001.
Here's why: the CMA solved a fundamental client problem by reducing complexity, optimizing regulatory compliance, and maximizing financial returns. It literally allowed clients to have their cake and eat it too.
The more I studied it, the more I realized it wasn't just a product—it was a blueprint for how financial innovation actually works. As the CMA evolved to integrate securities-backed lines of credit and enhanced card programs, it became my mental model for thinking about fintech's evolution.
I hope you enjoy this short series that dives into its history, design, and application.
Picture this: It's 1975, and Thomas Chrystie—Merrill Lynch's first-ever Chief Financial Officer—is sitting in his corner office looking at a problem that's keeping him awake at night.
Chrystie isn't your typical Wall Street executive. Columbia Phi Beta Kappa, NYU MBA, started at Merrill as a trainee in 1955 and worked his way up through every division. The kind of guy who actually reads the footnotes in regulatory filings for fun. And right now, those regulatory filings are telling him something extraordinary.
His customers are getting screwed. Badly.
Here's what Chrystie sees: Merrill's wealthy clients keep substantial cash balances—sometimes hundreds of thousands of dollars—sitting in bank checking accounts earning exactly 0%. Their savings accounts? Thanks to a Depression-era rule called Regulation Q, banks can't pay more than 5.25% on deposits. Meanwhile, inflation is running at 8%, 10%, sometimes 12%. His customers are losing money just by being responsible.
But here's the kicker, and this is where Chrystie's regulatory obsession pays off: there's a loophole big enough to drive a truck through.
The Math Guy Who Saw the Future
Enter Andrew Kahr. Harvard undergrad, MIT PhD in mathematics, and the kind of person who later claimed he invented the Merrill Lynch cash management account like he was discussing the weather.
Kahr wasn't a Merrill employee. He was a consultant who specialized in finding regulatory arbitrage opportunities, essentially ways to legally circumvent rules that made no economic sense. And boy, did he find one.
The insight was elegant in its simplicity. Banks are regulated utilities. They have to follow Regulation Q, hold reserves, get FDIC insurance. But money market funds? Those aren't deposits, they're investments. They can pay whatever Treasury bills and commercial paper are yielding. In 1975, that's 8-12%. Sometimes more.
So why not automatically sweep customer cash into money market funds every night?
The problem was that Merrill Lynch wasn't a bank. But as Kahr realized, that wasn't a problem. That was the solution.
The Stanford Connection
But there's a bigger challenge. How do you actually build this thing? Combining a brokerage account, a money market fund, checking capabilities, and a credit line into one seamless product had never been attempted. The operational complexity is staggering.
This is where the story gets really interesting. Chrystie reaches out to SRI International, the legendary Stanford Research Institute that had helped invent everything from computer networking to the computer mouse. Specifically, he contacts Dr. Carl Spetzler, who runs their Financial Industries division.
Spetzler brings something revolutionary to the table: Decision Analysis methodology. It's a mathematical framework developed at Stanford for optimizing complex systems with multiple interdependent variables. The military uses it. Aerospace companies use it. Nobody has ever applied it to retail financial services.
Working with Spetzler's team, they map out every possible customer interaction. What happens when someone writes a check but doesn't have cash? How do you automatically liquidate money market shares without the customer knowing? What if they want to buy stocks on the same day they write a big check? How do you handle the credit line integration?
The mathematical modeling reveals something beautiful: you can make all of this invisible to the customer while optimizing their returns automatically.
The CEO Who Bet the Firm
While Chrystie and Kahr are working out the details, they need air cover from the top. Fortunately, they have Donald Regan.
Regan is old-school Merrill. Joined the firm in 1946 after serving as a Marine Lieutenant Colonel. Harvard College, tough as nails, and absolutely convinced that the financial services industry is about to be turned upside down.
In 1976, Regan publishes Merrill's strategic plan announcing they will offer a diversified array of securities, insurance, banking, tax, money management, financing, and financial counseling. He's essentially declaring they're going to become a financial supermarket before anyone knows what that means.
When Chrystie presents the CMA concept, Regan immediately grasps the implications. This isn't just a product. It's a declaration of war on the banking industry.
The Launch That Changed Everything
May 1977. The Cash Management Account goes live.
The mechanics are elegant in their simplicity. Every night at midnight, Merrill's computers automatically sweep customer cash into a money market fund. When customers write checks or use their debit cards, the system automatically liquidates money market shares to cover the transactions. If they go over their balance, the integrated credit line kicks in automatically. One statement, one account number, one relationship.
For customers, it's magical. They're earning 8-12% on their checking account while banks pay nothing. They get one statement instead of four. Everything just works.
For banks, it's an existential crisis.
The Numbers That Broke Banking
By 1981, just four years after launch, 300,000 customers had opened CMAs. That's $45 billion in assets that had been sitting in bank checking and savings accounts, earning nothing for customers and providing cheap funding for banks. Gone. Overnight.
Community banks across America watch their most profitable customers, wealthy individuals and small businesses, move their operating cash to Merrill Lynch. Not their investment money. Their day-to-day transaction accounts.
The banking industry's reaction is swift and predictable: panic, followed by furious lobbying to shut down the CMA. But it's too late. The regulatory arbitrage is perfectly legal, and customers love it.
The Patent Strategy Nobody Saw Coming
Here's where the story takes an unexpected turn. Merrill Lynch decides to patent the whole thing.
Now, you might think they filed for patent protection before launching the product. You'd be wrong. The primary patent wasn't filed until July 29, 1980, three years after the CMA launched.
Why the delay? Because they were essentially patenting a new category of financial product that nobody had ever conceived of before. The Patent Office had no framework for evaluating it.
The patent filing reveals fascinating details. The inventor listed is Thomas Musmanno, a name that doesn't appear in any of the business development stories. Chrystie, Kahr, and Spetzler aren't named anywhere on the patent. This suggests the legal filing involved different technical personnel than the original conceptual developers.
Even more interesting: Merrill Lynch had to cite their own marketing materials as prior art, including their CMA Money Trust Prospectus from 1978. This created a bizarre situation where the Patent Office initially rejected the patent for being obvious based on the applicant's own prior work.
The Million-Dollar Settlements
When competitors try to copy the CMA, Merrill Lynch comes out swinging. They demand a $10 annual licensing fee for every competing account, a strategy that rival financiers originally laughed at, according to TIME magazine coverage from 1982.
Nobody's laughing when Dean Witter Reynolds writes a $1 million check to settle patent infringement claims out of court.
Paine Webber decides to fight, taking Merrill Lynch to federal court in Delaware. Their argument: you can't patent a business method, and besides, the CMA is obvious once you think about it.
The court disagrees. Merrill Lynch's patent stands, and competitors face a choice: pay the licensing fees or develop workarounds that make their products inferior to the original.
The Revolution Nobody Expected
By 1989, twelve years after launch, half of Merrill Lynch's $304 billion in customer accounts were CMAs. The product had fundamentally transformed not just Merrill Lynch, but the entire concept of how financial services could be delivered.
But here's what's really fascinating: nobody at Merrill Lynch initially understood how revolutionary this was. They thought they were launching a premium product for wealthy customers. Instead, they'd created the template for modern integrated financial services.
Every successful fintech today is basically building some version of the CMA. Robinhood combines investment accounts with spending accounts and cards. SoFi integrates loans with investing, banking, and insurance. Chime offers banking with savings optimization and credit building.
The pattern is always the same: take services that customers currently manage across multiple providers, integrate them intelligently, and use technology to optimize outcomes automatically.
The Lesson Hidden in Plain Sight
The CMA story isn't really about financial innovation. It's about regulatory arbitrage at massive scale.
Chrystie, Kahr, and their team identified a fundamental disconnect between customer needs and regulatory constraints. Banks were forced to offer terrible products due to Depression-era rules. Money market funds could offer great returns but lacked the convenience of checking accounts. Brokerage firms had investment expertise but couldn't offer banking services.
The CMA didn't solve this by changing the regulations. It solved it by finding the seam between different regulatory regimes and building a product that lived in that seam.
For today's fintech entrepreneurs, the question is: What regulatory arbitrage opportunities exist right now? Where are customers leaving money on the table because services aren't integrated? Where do artificial regulatory boundaries create opportunities for better products?
The next CMA is probably being built in someone's garage right now. The question is: are they thinking big enough about the regulatory seams they can exploit, and are they building defensible moats around their innovation?
Because here's what Merrill Lynch proved in 1977: when you can make customers significantly wealthier by integrating existing services in new ways, they'll reward you with their complete financial relationship. And when you patent the process, competitors will literally pay you to copy what you've built.
That's not just a business model. That's a blueprint for transforming entire industries.
Next post: "The Patent That Built a Moat" - How Merrill Lynch's intellectual property strategy created a nearly unbreakable competitive advantage, and what modern fintechs can learn about defensibility in financial services.