One on One with Tom James, Chairman and CEO, Raymond James
Tuesday, December 18, 2007
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SUSIE GHARIB: Goldman Sachs managed to skirt sub- prime mortgage market issues in its latest quarter. But now, investors are waiting anxiously for Morgan Stanley and Bear Stearns to report to see what impact the credit crisis has had on those big Wall Street firms. But there are no worries about Raymond James Financial. It's the largest independent regional brokerage in the country and it has almost no sub-prime exposure. Joining us now to talk more about the firm, Tom James, chairman and CEO of Raymond James. Mr. James, welcome to NIGHTLY BUSINESS REPORT and congratulations on your smart strategy about this whole sub-prime market.
TOM JAMES, CEO, RAYMOND JAMES: Thank you, Susie. It's a pleasure to be with you.
GHARIB: How did you and your firm's brokers avoid the temptation of offering mortgage-backed securities during the whole sub-prime mortgage boom?
JAMES: Essentially there are about three ways that we can be impacted by sub-prime. We have a bank subsidiary. The bank subsidiary did not participate in the sub-prime market. Instead they both originated loans with our clients which have high credit ratings and they purchased loans in the market. But when they bought pools (ph), they individually underwrote every single loan and only took the loans that met our qualifications which were high.
The second thing that could happen is in the cash trust that our mutual fund has, you could have had SIV exposure but we run a triple-A high quality fund and we had no asset-backed commercial paper. And then the third thing that can happen to you is when you're trading in your fixed income department, you could be doing a lot of business and have a lot of inventory that would be exposed, but actually since we do not offer those securities to our clients because we think fixed income should be very highly rated and be the secure part of a portfolio, we avoided that and only the gyrations in the overall market impacted us at all. Otherwise we were (INAUDIBLE)
GHARIB: Have you observed the big Wall Street firms and how they're coping with the sub-prime crisis? How long do you think it's going to take them to work through all of this and through all the write offs?
JAMES: I actually think that the investment banks will know sooner because they'll have better pricing mechanisms to know what losses they've experienced. The real issue for them will be in legal liability for outstanding SIVs that they issued, et cetera. And that's probably the reason why you saw the action at Citigroup to take seven of them back on to their balance sheet. So, you know, my guess is with resets going on, all financial institutions will still have some problems for the next 12 to 18 months.
GHARIB: Do you think that this turmoil could be the catalyst for consolidation between investment banks and brokerage firms?
JAMES: I don't think between investment banks and brokerage firms, but I think there's a good chance that some of these weaker institutions will be snapped up as a result of their capital structures. As you know, some of these low prices in some very prominent lenders that actually are good lenders, I would tell you, may be very attractive to potential buyers.
GHARIB: Let me bring it a little closer to home. What about Raymond James? It's been a rumored takeover target ever since Wachovia bought AG Edwards and other regional investment firms. Under what conditions might you consider merging or acquiring another company?
JAMES: We're always in the market to look for other broker dealers and asset managers for acquisition sake. We have actually been well served retaining our independence over the years. When AG Edwards was acquired by Wachovia, we actually got a number of brokers from AG Edwards. I expect that will continue. That happened with the whole state of acquisitions in our industry that occurred prior thereto. So we've been served very well. We're an independent place to come. We're 42 percent owned by our share -- by our employees and we continue to reward our shareholders with about 25 percent compound growth. So I don't see any reason that we need to sell to anyone.
GHARIB: We just have a little bit of time left. I'd like to get your outlook for 2008 on the markets and also any sense of the attitude, the appetite for buying stocks from your investor clients? What's the mood with Raymond James?
JAMES: Actually, I would tell you the investor attitude has been surprisingly good, given all this negative publicity and underlying malaise. We have experienced good monthly commission and fee income during our first couple of months. And I suspect that that will continue going forward until we get into a condition which might be recessionary. And I think that the risk of that has increased. So if you ask me where I came out on where the market would be a year from now, I'd probably tell you that there's 30 or 35 percent chance that it could be down by as much as 5 to 10 percent from here.
GHARIB: We're going to have to leave it there. We'd love to hear more. Maybe we'll get you back in the New Year. Thank you so much for coming on tonight.
JAMES: Thank you very much, Susie. Have a happy holiday.
GHARIB: Same to you, sir. My guest tonight, Tom James, chairman and CEO of Raymond James Financial.
