Based in Baltimore and Washington, Ferris, Baker Watts is one of the largest local brokerage firms. Its CEO, Louis J. Akers Jr., recently discussed the effects of the terrorist attacks, the fallout from an $18 million loss and the future for regional brokers.
Ferris, Baker Watts was recently hit with an $18 million loss after MJK Clearing Inc., a stock clearinghouse you had loaned the money, failed. What happened?
That was a stock loan issue. There were a number of companies involved. A number of companies took losses because of the failure of that company in Minnesota, and we're, unfortunately, one of those companies.
Was a loan of that sort unusual for Ferris?
The stock loan is important to every firm in this industry. It's how they finance margin debt and finance some of the operations of their firm because its a low-cost provider of funds. We have had stock loan for 17 years and we've never had a significantor even an insignificantproblem. Unfortunately, we got caught in a happenstance [situation.] The stars all lined up the wrong way. You had the biggest failure in 30 years by a brokerage firm, and you had a company whose stock dropped immediately. There were a lot of things that came together at once and a lot of things that you don't ever expect to happen that did happen. Unfortunately, a lot of firms are going to lose some money over it.
Was that an unusually large transaction for Ferris?
It was a good size transaction. But I wouldn't say the size of the transaction was overwhelming, no.
Was it the largest loan-type transaction that Ferris has been involved in?
No. There are two things that I want to make clear. Number one, $18 million was Ferris, Baker Watts' money, and not our clients' money. This is not a situation where our clients lost money and we had to put it back in their accounts. Our clients' money was never at risk here. Number two, $18 million is the maximum. It could be less, we're just not sure. While you never like to have any charge at all, it doesn't change our fundamental financial position at all. We still have about nine times the capital that we need, so we are in good shape.
It did come at a bad time, though, with the market in the shape that it's in.
Understand one thing, Ferris, Baker Watts -- and we're a private firm, so these numbers aren't out there -- we operate profitably, even in these tough times. We are not operating at a loss and haven't been. It's never good, but it's not coming at a time where we've had any operating losses. It's bad but, again, it's not the end of the world.
Speaking of the tough times, things were bad in the financial markets before September 11 and they've only gotten worse.
I think they're better for us. I view September 11 as a bottom for our business. Our business has improved substantially since then.
By what measure?
More activity, I think our clients are more active.
So you are seeing more trades?
It's not just revenues; it's overall activity, opening accounts, accounts transferring. Our overall level of activity has picked up.
What are some things that make managing a brokerage difficult right now?
Managing a brokerage firm is always challenging. It's a people industry. Bethlehem Steel filed Chapter 11 but Bethlehem Steel's real asset was their plants and their equipment. The overall prognosis for the steel industry has diminished. The brokerage industry is just the opposite. In the last 15 years the world is doing more brokerage-type business than ever before because of the number of people that are in 401ks and IRAs and retirement accounts. People are much more aware of investing in equities. There is a tremendous demand for our product.
Our assets are our people. Those people are both expensive and, because of the nature of people, they are free to go anywhere they want to. When you're in the brokerage business, your assets walk out the door every day. It's always difficult to make sure that you're hooking the people that you want to hook and keeping them happy. You have to balance that with running a business and keeping expenses in line. It's not an easy business to manage in any environment.
You had to lay off a few people before September 11, is that something that you expect to have to do again?
I think that there are two things that we are always going to be doing. We are going to be looking for more effective ways to do things. Where that means less people, unfortunately, there will be people who are no longer employed at Ferris, Baker Watts. We will always let ineffective people go. That wasn't the case with the layoffs of the analysts, but there will always be personnel changes. Our overall turnover rate is very low. We have great retention of employees across the board.
Ferris is one of the few remaining regional brokerage firms. After national companies have bought so many, is the era of the regional firm over?
No, I don't think so. I think the era of the regional firm may just be beginning. If you go back to 1989 and '90, everybody that I knew was predicting that within the decade there would be three or four major banks left in the United States. It was considered the end of the regional bank. If you look today, First Mariner just turned in terrific earnings, Columbia bank is doing a great job, and you've got Susquehanna Bancshares -- just look at the small banks that are around today. There are probably more regional banks around Maryland today than there were 10 years ago. I think the brokerage industry is a lot like that. Everybody said there would be Merrill Lynch and maybe a couple other companies. The race was to get bigger and bigger. The bottom line is the same client that enjoys the privacy and intimacy of a relationship with a community bank often enjoys that same relationship with a regional brokerage firm.
Is the sale of Ferris something that you would be interested in?
I'm just one person. We have a lot of shareholders. I'd like to see Ferris, Baker Watts be around for a long, long time. I'd like to think that my son one day, maybe won't work at Ferris, Baker Watts but will deal with Ferris, Baker Watts, and I hope his son's or his daughter's children will. Ferris, Baker Watts doesn't need to be for sale and there's no reason for it to be for sale. We're pretty content being independent.
That was preliminary. I don't like to say they made a "hard" offer, because I don't think they really did. They offered a preliminary number that everybody would have to work to. It wouldn't have worked for us.
Where do you see the company growing in the coming years?
We've been very aggressive in the last year in the Midwest. We've opened up three offices in Ohio and three in Michigan. We'll continue that. We also may shut some offices. I doubt it but you always look and see. [Former GE CEO] Jack Welch, which I think everyone pretty much bows at the feet of when it comes to running companies, always said you can either grow a business or shut a business and if you are in a business that you wouldn't start today, then get out of it. We do analysis all the time -- is every business we are in a business we want to be in? Is every office that we're in an office that we should be in?
We're going to continue to expand our operations, certainly in the Midwest. In the South, we opened a Wilmington, North Carolina office. I would expect us to continue to expand in Virginia, North Carolina, Michigan and Ohio.
What about different areas of the market not just geographically? Would you like to be doing more initial public offerings of stock, for instance?
Not really. We have a very good capital markets effort, but we're not Morgan Stanley, we're not Goldman. We are not going to be in the middle of the next hot IPO market, and I think, in the long run, that will benefit us and it will benefit our clients. I'm not sure that the people who were in the middle of the [last] hot IPO market, either the companies or the clients, are very happy today.
Another trend of recent years that has now cooled significantly was Internet trading.
I have always said, Internet trading is not a place for a retail brokerage. It doesn't work. Retail brokerages are about relationships. The Internet, in general, is not about relationships. It's not that the Internet is bad. The Internet is about convenience. Well, relationships aren't always convenient, but in the long run they seem to turn out to be the best way to go about things.