New York -- The economy's in shambles and conditions are dreadful for companies that sell clothing, homes and the like.
But for those who sell financial products -- the nation's major brokerages and investment banks -- 1991 has emerged as a superb year.
Profits per employee are likely to exceed the $22,300 earned in 1986. A strong fourth quarter may push overall industry profits above 1986's record $5.5 billion. And though lucrative business lines such as leveraged buyouts have evaporated, Wall Street is prospering from activities that even the industry's severest critics would endorse: providing capital to businesses in need, and returns to individuals willing to invest.
Two Baltimore-based firms, Alex. Brown & Sons and Legg Mason Inc., have been sharing the good times. Each recently reported strong quarterly financial results.
Still, the sudden burst of prosperity is being viewed with trepidation.
"It's never sustainable," said Raymond A. Mason, chief executive of Legg Mason, whose profits jumped 26 percent, to $4.6 million, in the most recent quarter. "I've been in the business 30 years, and it's never sustainable."
Alex. Brown's chief executive, A. B. Krongard, agrees. "Earnings are sustainable if the market sustains itself, and the market is . . . irrational. It's all quite simple: [future profits] are unknown and unknowable."
Even product lines are suspect. "I am optimistic about none, cautious about all," said Mr. Krongard, whose firm earned $8 million in the most recent quarter, compared with a $3.1 million loss in the corresponding period last year. "General Motors can see changes coming a long way off; our business can change overnight."
Why the caution?
Too much has happened in recent years. Since the 1987 crash, the number of New York Stock Exchange-member firms, and the number of industry employees, has dropped by 20 percent, the Securities Industry Association notes. Just a year ago, most investment firms were laying off employees and wondering whether the industry was in a structural depression.
Even in the current benign environment, danger lurks.
Salomon Brothers Inc., for example, was racking up record profits before the August disclosure of its involvement in a Treasury securities scandal. Numerous other firms have been subpoenaed in a subsequent investigation and therefore may be at risk.
The question persists: Will they risk the fate of Drexel Burnham Lambert, which was the most profitable investment bank through most of the 1980s before running into well-documented legal problems, or of E. F. Hutton, a premier brokerage firm prior to the disclosure of a check-kiting scam? Drexel, in bankruptcy reorganization, is a mere skeleton; Hutton was forced to merge with Shearson Lehman Brothers.
Crime aside, a few bad decisions in an industry where its easy to bet the franchise can be equally damaging. Were it not for Credit Suisse, First Boston, another major firm, may have been killed by its ill-fated financing of Campeau Corp. Other firms, notably Kidder Peabody (owned by General Electric) and Prudential Securities, owe their continued existence to affluent corporate parents.
The greatest threat now may a sudden, steep, increase in interest rates. Rates have declined dramatically since early 1990 and are now at levels rarely since since the 1960s. That has increased the attractiveness of stocks and bonds for investors, providing commissions for brokerage firms. And it has prompted companies to issue record amounts of equity and debt, providing brokerage firms with strong underwriting fees. A continued rise in registration statements with the Securities and Exchange Commission suggests that more business is to come.
A sudden increase in rates, however, could undermine the trend, squashing retail commissions and underwriting fees.
And that's not the only fear. Already, the most compelling feature for stock market investment, the value of shares, appears suspect. Stock prices are expensive by many common benchmarks.
Another October crash, coming amid weak economic growth, could demoralize the industry -- and its customers.
On the other hand, the financial performance of investment companies has been consistently surprising. Enthusiastic expectations during the 1980s proved unfounded, and so have the depressing forecasts routinely delivered in 1990.
"I'm a lot more optimistic now than I was at the beginning of the year, when I thought business would be dreadful," said John Keefe, an analyst at Lipper Analytical Services. "Revenues have been sustained, and companies haven't yet begun to shovel money out the door."
Penny-pinching has become one of the industry's stated obsessions and may sustain its success. "We are trying to minimize any additions, keep costs as low as possible," Alex. Brown's Mr. Krongard said.