Raymond James Financial
A Stock and a Hard Place
St. Petersburg brokerage Raymond James had virtually no exposure to the subprime mortgage market. Try explaining that to investors.
Shortchanged: Short sellers “didn’t understand what our bank was doing,” says Raymond James CEO Tom James. The company’s stock fell to just over $20 in March, down 40% in just five months. A recent rebound vindicates the company’s conservative approach, James says. [Photo: Bob Croslin]
When the issue of investing in the subprime market had come up during the previous few years, the company’s product approval committees had steered clear. Raymond James’ bank had stuck to strict standards in making mortgage loans or in buying them from other institutions. And the company’s brokerage operations had avoided buying collateralized mortgage securities based on subprime loans — pools of home loans bundled into bond-like instrumets and sold on the secondary market.
“If we have inventories of securities, they are for the eventual purchase by our clients,” says James. “And if you think about those kinds of securities that you might have had subprimes in, we don’t believe that our clients should take their fixed-income capital and invest it in high-risk securities. If they want to take risk, they can do that on the equity market.”
|Gross Revenue (billions)|
|5-Year Annual Growth: 16%|
|5-Year Annual Growth: 26%|
|Shareholder Equity (millions)|
|5-Year Annual Growth: 16%|
|Source: Raymond James|
James says the firm wasn’t clairvoyant about the subprime troubles to come — the decision was simply consistent with the “conservative bent” that’s been at the heart of the company since his father founded it in 1962. “Since our bank is a depository for clients in the brokerage, and it’s viewed as a depository with a lot of cash equivalents, we take the position that you must be on the very high road” to protect customers’ assets, he says.
Taking the high road, however, didn’t save the company when the subprime industry collapsed. The stock market punished Raymond James right along with subprime-heavy financial services firms. To James’ surprise, investors shorted Raymond James shares, which tumbled from more than $37 at the end of October 2007 to around $20 a share in March.
In a conference call with analysts in April, James was incredulous: “As I sit here and I look at the shorts in our stock and I’d say, ‘What are these people doing?’ ” The short-sellers, James says in a later interview, “didn’t understand what our bank was doing. No one was differentiating the well-managed firms from those who were suffering due to bad decisions.”
The Federal Reserve Board’s practice of lowering overnight lending rates was also taking a toll on the company. Since 2006, Raymond James Bank had offered its brokerage clients the opportunity to sweep their cash into an RJ Bank overnight deposit program, which paid a certain rate that was set weekly. As the Fed began lowering its overnight lending rates, Raymond James found itself in the position of paying its clients more than it was earning overnight because it had set rates that would not change for a week.
As its stock fell, the company managed to hold its own financially. The firm’s net revenue rose 11% from the year-earlier period to a record $692 million. Gross revenue of $807 million grew 9%. But because operating costs increased 13%, profit rose only slightly to $59.8 million in the second quarter, which ended in March. While those results are far from stellar, as James points out, they are at the very least a “pleasant relief from the incessant flurry of write-offs and negative earnings comparisons” reported by a number of larger financial services companies. Moreover, the company has not had to write off subprime loan losses as many of its competitors have.
James says there’s plenty of blame to go around for the present mess. He faults the underwriters who abandoned traditional standards and the ratings firms that weren’t conservative enough in evaluating complex securities. Financial managers at brokerages, he believes, should have sensed that the market had become overly aggressive.
He also blames the regulators who he thinks should have fired a warning signal when subprime mortgage originations hit the 10% watermark. “They should have gone to their banks and said, ‘We take a dim view of originating more than 10% subprime, so in our investigations when our staff is out in the field that’s going to be a reportable event.’ That’s all they had to say. Then their staff out there would have cited a couple people, and you would have all of a sudden modified behavior.”