Q & A
Taking stock of the brokerage business
A bad financial market was made worse on Sept. 11; How is a regional stock broker like Ferris, Baker Watts coping?
Ferris CEO Louis J. Akers Jr. on layoffs: "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." (October 28, 2001)
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.