David Macchia: The events that have played out in the economy in recent months have been remarkable. I know you’ve witnessed a great deal in your career. People classify these events as the worst since the Great Depression. I vividly remember my dad, who was a Depression baby, telling me about some of the things that he saw and felt during that time. What I’d like to ask you is this: if President Obama came to you and said, “We have a real mess here and we need to approach the cure of this in a different fashion than we traditionally would. We want you, Tom James, to be the Czar of Financial Services, and we’re going to give you the unilateral power to manage us out of this.” What are some of the concrete things you’d be thinking about doing to help us get over this financial crisis?
Tom James: Well actually the government’s first focus during this period was to preserve the payment system and lending capability of the banking system. The Treasury Department and the Federal Reserve Bank coordinated first to accommodate acquisitions of troubled institutions by stronger institutions, as exemplified by the purchase of Bear Stearns by JP Morgan. The government assumed little risk while shareholders of Bear Stearns took a substantial loss. That approach limited the damage to other institutions and the system. Similar transactions occurred later for Countrywide and Washington Mutual. To establish that they weren’t going to bail out every problem institution, Secretary Paulson chose to let Lehman go bankrupt as level three (illiquid) assets far exceeded net worth. In retrospect, it might have been preferable to spend more time to find a buyer to avoid the collateral damage to other firms, but the principle was important. The government rescued Fannie Mae, Freddie Mac and AIG, essentially nationalizing them.
Obviously they had to employ a systemic solution, which led to the $700 billion TARP bill. While the initial plan was to buy problem mortgages, they elected to invest in preferred stock in better rated institutions. Now that they have utilized half the money, they are proposing to buy mortgages in the market to reduce rates as well as arranging aid for homeowners to keep their mortgages current. Both of these phases were appropriate.
It’s now time for the government to apply a fiscal stimulus plan to revitalize the general economy as the malaise has created a problematic recession. It will take six to 12 months for these steps to work. We will need to be patient until confidence returns.
I don’t know how deep or how broad the relief will be in the next stage, but it’s probably not necessary to say we’re going to save the auto industry as a whole. No firm has a business plan yet that indicates to me that any one of those companies is going to be saved by any injection of capital. Unless there is some plan that has a reasonable probability of success, the government shouldn’t invest. Contrast auto companies that are plagued with a legacy cost structure that is uncompetitive to a bank that has operated successfully until the subprime crisis. An injection of preferred capital or a loan supported by a government guarantee restores its ability to lend and to profit. It can repay the government loan. The government will make a profit from the preferred dividends and the warrant profit as the bank’s common stock rises. Money loaned to an auto company that doesn’t reduce labor costs and benefits as well as correct ridiculous work rules, will result in an unpaid loan.
So you’ve got to be very careful how you commit these funds and, needless to say, in emergencies, careful is a tough word to use because often there’s not enough time for thorough analysis and development of strategic plans to really do this intelligently. But it appears to me that so far the government has done this far better than we did either in the ’30s or the ’70s. I actually compliment all those that are getting a lot of grief currently for what they’ve done so far.
Macchia: Now, please don’t take this as an insult. One of the things that I’ve picked up from speaking with you, as well as in my independent research on Raymond James, is that the firm seems to be imbued with what I might call “old fashioned” values and principles. It seems as though every time I speak with you, the impression is reinforced that common sense is never far from the top of your mind. Looking at some of the economic excesses and questionable practices that are now widely acknowledged, it seems that you looked at those things and said, “They completely lost sight of common sense.” I’m wondering if you agree with me, if you see yourself and Raymond James that way? And, how do you keep a company grounded with the right operating philosophy?
James: You build cultures in companies by constant reminders on all the proven management principles and values that are necessary to run successfully. I spend a lot of my time, as do I think knowledgeable managers everywhere, in terms of trying to not only give the practical lessons that we’ve learned by making our own mistakes. We teach these principles and processes and inculcate systems that protect a business from shooting itself in the foot. At the same time, the nature of business is that there’s always risk in business.
When you delegate power and decision-making authority to your management team, you’d better make sure that you have selected the right people. Most of the rules that good companies follow weren’t invented by them at all — they’ve been around a long time. A lot of them are evergreen in terms of their application to any well-known business.
Macchia: What are you telling advisors about how they should be managing their clients’ anxieties and emotions right now?
James: We have been training financial advisors for years with respect to the values of diversification, asset allocation, planning and making investment selections based on all of the variables that affect the individual: age, net worth, risk profiles, etc. However, once people take losses, some of them decide they’re going to sell everything no matter what you tell them even though they understand that they may be giving up a chance for recovery.
When the market got down in the 8,000 range, we counseled that it was a little late to sell even though the outlook economically for corporate earnings and for the GDP in the U.S. in 2009 was not very pleasant. But there’s no magical formula. Frequent communication to your financial advisors and other associates is essential. You must convey your values and business principles and help your financial advisors communicate the right discipline to their investors. You must instill optimism, hope and a positive attitude in difficult times. Leadership connotes applying the objective light that is necessary to cut through the negative emotion spawned in markets like this one.
Macchia: Among big brands including Fidelity and Bank of America, T. Rowe Price and Vanguard, there’s a great deal of innovation in terms of Web-based technology, proprietary investment products and processes focused on managing the retirees’ needs and cash flows. It seems to me that these developments signal a ratcheting-up of the competitive threat to independent advisors. To what extent are you concerned about competition from these big brands?
James: You know, most of the independent firms have very open architectures with respect to product. The well-branded ones that people that are more comfortable with selling, are available to independent contractors as well as other smaller company products that may or may not be as stable in terms of their abilities to meet obligations like those we’re experiencing today. Thus, I would tell you that I think that whatever advantages we have in the independent contractor business relate to our ability to analyze those products and differentiate the good ones from the bad ones and then to provide superior service. So I don’t know that branding is going to make a lot of difference to the independent contractor.
Advisors are still going to be able to get the well-branded product wherever they go. Their own brand depends on their ability to add value in the financial and investment planning process.