Wall St. woes don't worry smaller firms

Executives at small broker-dealers and regional investment banks see opportunity in the frenzy on Wall Street, but they worry that new regulations will be burdensome. Although everyone in the industry has been affected by the crisis, smaller firms said they, unlike large firms, will be able to survive and prosper as stand-alone enterprises. Large firms held positions that were simply too heavily leveraged, officials at small and regional firms said. "The rest of the world is being reeled back into the kinds of conservative business decision making that we've always used," said Chet B. Helck, president and chief operating officer of Raymond James Financial Inc. of St. Petersburg, Fla. Many smaller firms take less risk because the partners' money funds the business. "Typically, the officers [of small firms] are owners," said Robert Muh, chief executive of Sutter Securities Inc. of San Francisco. "Our money is at stake. At many large firms, you may be a shareholder, but your objective is to maximize ordinary income. As principals of small firms, we don't think that way. You're careful about the transactions you underwrite, [and] you pass on some business." That might be one reason why regional firms are doing relatively well. They are generating profits and gaining market share, said Michael Decker, co-chief executive of the Regional Bond Dealers Association in Alexandria, Va. "Because a lot of larger firms have been suffering, it's created some opportunities for regional firms," he said. "That's been the running theme for nine months." The current crisis "is the greatest opportunity for us to grow that I've seen," said Ed Wedbush, president and chief executive at privately owned Wedbush Morgan Securities Inc., a 230-broker firm in Los Angeles. The firm has no debt, so it is able to act on opportunities, including recruitment of brokers and acquisitions of small firms, he said. Wedbush Morgan is close to completing a purchase of Peacock Hislop Staley & Given Inc., a Phoenix-based brokerage firm with about 40 employees that wanted to have a larger parent company, said Mr. Wedbush. He had another small acquisition in the pipeline, which he would not discuss. Wedbush Morgan has also been adding public finance professionals, though other firms have pulled back from that business, Mr. Wedbush said. Employees were added to offices in Seattle, Portland, Ore., and Solana Beach, Calif. "There is still a market for investment-grade municipal bonds," Mr. Muh said. "That portion of our business has not been adversely affected." Raymond James' recruiting has picked up "across the board," Mr. Helck said. The firm is hearing from retail brokers, public finance professionals, investment bankers, traders and research people, he said.

WORRIES OVER REFORM

But among smaller dealers, some worries surface on the regulatory front. As Congress debates regulatory changes, small firms want to make sure lawmakers understand that small firms, due to their limited size and scope of business, don't create systemic risks. Any reforms should establish a tiered regulatory system, they contend. "We think it makes lot of sense, as Congress tackles [the crisis], that they think about two tiers of firms," Mr. Decker said. "Generally, regional firms don't do a large amount of proprietary trading, they don't carry large inventories, they generally don't trade in lot of leveraged products like subprime-backed [collateralized debt obligations]," he said. "If there is a single regulator [as part of reform efforts] and Congress gets involved in that, I am concerned they will not make the distinction" between large and small firms, Mr. Muh said. Rules such as trade reporting and money laundering regulations fail to make that distinction, he said. It is likely the Federal Reserve will play a huge oversight role at the major firms. That is why regulatory observers expect more focus on safety and soundness issues, similar to bank regulation. "I think capital levels will definitely be on the table," Mr. Decker said. Regulators "will restrict the use of leverage," Mr. Wedbush said. "Firms will not be allowed to run" with 20- or 30-to-1 leverage ratios on fixed income assets, he said. Mr. Wedbush does not anticipate that new rules will be a problem for smaller firms. E-mail Dan Jamieson at djamieson@investmentnews.com.