Schwab & Co. Tells of $22-Million Loss in Market Crash : Big Investor’s Options Position Mostly to Blame, Chief Says
Heavy losses continued to ripple through corporate America Thursday as the parent company of Charles Schwab & Co., the nation’s largest discount brokerage firm, revealed that it has sustained losses of $22 million in the stock market crash.
Most of the losses resulted when a large customer, identified only as a corporate investor in the risky options market, failed to satisfy claims--known as margin calls--on unsecured debts of $84 million, Schwab & Co. said.
Schwab & Co. said it has reached a settlement by which the customer will repay the brokerage house $67 million, primarily through a $42-million, non-interest-bearing note payable over five years. The other $25 million is to be paid within the next two weeks, the brokerage house said.
“The losses of the entire industry have been dribbling out, and we are, we think, one of the first to come forth with the aftermath of what happened last week,” Charles R. Schwab, company chief executive, said at a press conference in San Francisco.
Schwab & Co. is, in fact, the fourth major financial services company this week to report heavy losses related to the stock market crash. Others have been Continental Illinois Corp. in Chicago, L. F. Rothschild & Co. in New York and Columbia Savings & Loan in Beverly Hills.
The announcement put additional pressure on other brokerage houses around the country to reveal the extent of their damage from the market’s steep slide. While some admitted to losses, none said they would approach $22 million.
Jefferies Group in Los Angeles, for instance, confirmed that it would lose between $5 million and $10 million in October because of customers who didn’t take delivery on stocks, while Piper Jaffray in Minneapolis said it had trading problems similar to Schwab’s but none as serious.
Schwab & Co.’s announcement didn’t surprise some securities industry insiders. As one securities executive put it, the “street was humming all week long that Schwab was exposed.” Nevertheless, given Schwab & Co.’s relatively small size in the general brokerage industry, the extent of the loss was unexpected. The loss effectively wipes out company profit since March 31, when Schwab bought back the firm he founded from the BankAmerica for $230 million.
“I’m sure other (larger) brokerage houses have suffered losses of that magnitude, but it probably won’t hurt as much,” said Brenda Davis McCoy, a brokerage analyst for the investment firm of Paine Webber in New York.
Large Reserves
“I can assure you we don’t have any accounts worth $84 million,” said Thomas C. Quick, president of New York-based Quick & Reilly Group, another large discount brokerage.
In a statement, company Chairman Leslie Quick Jr. acknowledged that some of its heavily leveraged customers in options have sustained unrecoverable losses, but he noted that the brokerage has reserves to cover all but $2 million of those losses.
Chief Executive Schwab, at his press conference, acknowledged that the exposure to such heavy losses won’t happen again. “We have no other customers of this magnitude at all and will not have in the future,” he said.
Schwab & Co.’s losses also point up the dangers of options investing, an area that’s particularly treacherous when the stock market takes an unexpectedly large move in one direction, as it did last week.
Options, which are traded on the nation’s securities exchanges, are contracts that give investors the right to buy or sell stocks at a certain price within a certain period of time. Sometimes, options are used as conservative tools that allow investors to hedge against losses in the underlying stock.
Other times, though, they are highly speculative investments that allow investors to bet on stock movements without buying the stock itself. It was these so-called uncovered, or naked, options that caused most of Schwab & Co.’s losses when the recent bull market collapsed suddenly, company officials said.
The value of these options plunged along with the stock market. “Keep in mind that options prices have cascaded downward more in percentage terms than equities have,” said Perrin Long, analyst for Lipper Analytical Securities in New York.
Most of Schwab & Co.’s troubles occurred Oct. 19, the day the Dow Jones industrial average fell 508 points, its worst day in history. When the market plunged, the unidentified customer couldn’t meet its margin call, Schwab said, adding that it had otherwise “been a very good customer for three years.”
Tom Furlong reported from Los Angeles and Norma Kaufman from San Francisco.
Related stories, Pages 3, 4, and 9 FALLOUT FROM THE MARKET CRASH COMPANY Charles Schwab & Co. WHAT HAPPENED $22-million loss, primarily from major customer with large uncovered option positions who failed to meet margin calls. COMPANY L.F. Rothschild & Co. WHAT HAPPENED $44 million in trading losses, primarily from arbitrage. COMPANY Smith Barney, Harris WHAT HAPPENED Unspecified trading losses that will reduce fourth-quarter earnings of parent, Primerica Corp. COMPANY Continental Illinois Corp. WHAT HAPPENED $90 million in losses at First Options clearing house subsidiary, mainly from brokers unable to make payments. COMPANY Columbia Savings & Loan WHAT HAPPENED $25-million fourth-quarter loss from securities portfolio. COMPANY Masco Industries WHAT HAPPENED “Substantial unrealized decline” in securities portfolio that had been worth over $200 million on Sept. 30. COMPANY Comdisco WHAT HAPPENED Said the value of its risk-arbitrage investment declined about $100 million but core business won’t be affected. COMPANY Jefferies Group WHAT HAPPENED Expects to lose $5 million to $10 million because of customers who did not take delivery on stock. COMPANY Haas Securities Corp. WHAT HAPPENED Small brokerage firm closed by New York Stock Exchange due to financial problems. COMPANY William D. Mayer & Co. WHAT HAPPENED Small brokerage closed by NYSE due to financial problems.COMPANY American Investment Group Inc. WHAT HAPPENED Small brokerage closed by NYSE due to financial problems. COMPANY Metropolitan Securities WHAT HAPPENED Small brokerage closed by NYSE due to financial problems.COMPANY H.B. Shaine & Co. WHAT HAPPENED Small regional brokerage quits business. COMPANY W. Damm M. Frank & Co. WHAT HAPPENED NYSE specialist operation taken over by Bear Stearns. COMPANY A.B. Tompane & Co. WHAT HAPPENED NYSE specialist operation taken over by Merrill Lynch.
