Shearson, 1st Boston Consider Cost Cutting to Cover Crash Losses
Shearson Lehman Bros. and First Boston became the latest and biggest Wall Street firms to report damage from last month’s stock market collapse, confirming Tuesday that they incurred crash-related losses for October and are considering various cost-cutting measures.
Shearson said it lost $70 million after taxes in October, with $46 million of that stemming from its role as an underwriter in the recent stock offering of British Petroleum and the rest due largely to trading activities. The actual losses from the crash were probably much higher given that they were offset by earnings from other operations and by tax benefits.
Shearson, the nation’s second-largest securities firm on Jan. 1 as measured by capital, added that it will continue an ongoing review of staffing and expenses but will not abandon any lines of business.
“October was obviously a difficult month for the securities industry and for parts of our firm,” Peter A. Cohen, Shearson’s chairman and chief executive, said in a statement.
First Boston, ranked sixth, confirmed that it also will report a loss for October, due largely to risk arbitrage, a type of stock trading involving speculation on takeover candidates that was hit particularly hard in the market nose dive. The firm also said it would continue a review of its operations but would not jettison any business lines. First Boston would not specify the size of its October loss, first revealed in an internal memo to employees a week ago, but some sources estimated the deficit at about $60 million.
The red ink at the two venerable Wall Street firms provides further evidence of the bloodletting brought on by the historic Oct. 19 market free-fall.
Firms reporting losses, or lower profits, so far include Morgan Stanley & Co., Smith Barney & Co., L. F. Rothschild & Co., Charles Schwab & Co. and Jefferies Group, and others are expected to join the list. Most firms incurred losses from trading for their own accounts, rather than for customers, a growing practice among securities firms in recent years as profit margins from commissions have eroded.
Those losses in many cases have more than offset higher commissions from handling the heavy trading volume surrounding the Black Monday crash. Several Wall Street firms incurred similar deficits last spring during a sharp decline in the bond market.
The losses could have a dramatic effect on both companies’ earnings this year. Shearson, which is 60% owned by American Express, earned $189 million in the first nine months of this year, down from $215 million in the same period a year ago. First Boston earned $103.8 million in the first three quarters, down from $118.9 million in the year-ago period.
However, the losses so far are minor, compared to the total capital of the firms, and thus are expected to have little negative effect on their long-term financial health. Shearson’s $70-million setback, for example, is a mere fraction of its total $3.25 billion in capital at the end of October, down from $3.39 billion a month earlier but up from $2.45 billion a year ago.
The expectations of cost-cutting moves by Shearson and First Boston also illustrate how the crash has added to pressures that Wall Street firms already felt from declining profit margins, slowing growth and increased competition. Several firms, including Salomon Bros., Kidder Peabody and L. F. Rothschild, already had announced cutbacks, particularly in municipal bonds, which have been hard hit by limitations imposed under tax reform.
“This is a natural consequence” of the tremendous expansion during the bull market, said Nancy Young, financial services analyst with Tucker, Anthony & R. L. Day. “At some point they’ve got to cut back.”
Shearson’s $70-million deficit for October is the biggest crash-related loss reported so far by any Wall Street firm. Analysts, however, said the size of Shearson’s hit was not a surprise, given what it was expected to lose in its role as one of four American underwriters of the British Petroleum stock issue.
Before the Oct. 19 crash, Shearson and other firms had agreed to buy their portions of the $12.4-billion offering at $65 per American depository receipt, through which many Americans buy shares of foreign firms. (Underwriters buy shares of a new offering with the intent to resell them to investors at a profit.) But the market collapse caused the resale price to decline sharply, forcing underwriters to eat the difference. Also, many shares are as yet unsold.
Goldman, Sachs & Co. and Salomon Bros., two of the other American underwriters, have not disclosed losses from the deal. The other underwriter, Morgan Stanley, said recently that it would lose an unspecificed amount on the British Petroleum offering but would still break even for October thanks to gains from other operations.
On the prospect of cutbacks, Shearson chief Cohen said the firm “is continuing its review of operations with a view to controlling expenses and staffing levels,” but “the company is not exiting any lines of business.”
Shearson spokesman Michael O’Neill said the 27,000-employee firm already is under a limited hiring freeze, and earlier this year it trimmed staff at its London and public finance operations.
Analyst Young said Shearson has been more cautious than many of its competitors in expanding in recent years, so its cutbacks may not be as extensive.
At First Boston, Chief Executive Peter T. Buchanan disclosed in an internal memo issued to employees Nov. 2 that the firm’s “personnel growth rate will moderate substantially.”
First Boston spokeswoman Monica Prihoda said the 5,500-employee firm had been expanding its work force at a 25% annual clip over the last few years, and that rate was likely to slow down anyway. She said the firm was reviewing cost-cutting alternatives as part of a strategic planning program held once every three years that was scheduled long before the market collapse.
In New York Stock Exchange trading Tuesday, Shearson Lehman shares slipped 12.5 cents to $14.875, while First Boston fell $1 a share to $25.25.
