Last fall, when Alex. Brown Inc.'s profits were down, when the nation's oldest investment bank was laying off staff, when big losses by banks and insurance companies made it look like the whole financial system was headed for the sewer, Bethesda investor Robert Torray knew what he had to do.
He bought more Alex. Brown stock.
Good move. Alex. Brown is back. Its shares are up 100 percent this year, and the company's $10.6 million first-quarter profit was more than Alex. Brown made in all of 1990, and about as much as it made in all of 1989.
Aided by the stock market's rebound, Baltimore's biggest and most blue-blooded investment bank is cruising. On top of the strong profit, Alex. Brown topped the securities industry during the quarter in underwriting stock offerings, beating even the New York-based titans. It has cut the growth of its fixed costs and slashed its inventories of stocks and bonds, lowering its risk. And it has sharpened its trading in over-the-counter stocks.
Chairman Benjamin H. Griswold IV is too much the unflappable, well-mannered, investment banker-type to crow that he knew it all along.
But, he says in his reasonable tones, he knew it all along.
far less of a bounce back than it would appear," he said, contending that while the securities industry was suffering through the late 1980s and 1990, Alex. Brown was cleaning up its house. It took a $7.4 million net charge to get out of part of its lease in the Bank of Baltimore building, where it now makes its headquarters, took losses on some of its inventory to clear it out, and laid off 34 people last year.
"The position we've gotten ourselves into wasn't the result of happenstance or good luck," A. B. Krongard, the company's chief operating officer, said. "Our goal was to set the business so it could make a little money in the worst times. We had the boat rigged, but it would have gone at a slow pace until a big wind came up behind it."
Mr. Torray, a Bethesda money manager whose firm is the largest shareholder in Alex. Brown with a 5.6 percent stake, agrees. "It's a high return business when business is good, and they ran it in a way that they didn't lose money in bad times," he said.
Even as the Alex. Brown enjoys the benefits of the market's turnaround and its own restructuring, another, subtler change is working its way through the 191-year-old company.
Five years after Alex. Brown sold stock to the public, ending its tradition of partnership, control of the board of directors will pass next month to outsiders. Several insiders, including Mr. Griswold's brother, Jack, vice chairman of the board, will step down from the board.
That is just the latest sign of change at a company synonymous with Baltimore's uppermost crust, where officials mention every few minutes during an interview the company's age and its traditions, where the chairman is a direct descendant of Alexander Brown himself. At Alex. Brown, bankers even have a )) polite way to talk about "junk bonds." They call them "emerging credits."
"We're seeing changes already," said Perrin Long, a securities analyst at First of Michigan Capital Corp. in Detroit and a Gilman School graduate who counts Alex. Brown board members among his former schoolmates. "They've got more and more managing directors who are not from the Blue Book of Baltimore. They're moving more into the mainstream of how investment banking firms in New York look. You'll see Brown become less conservative, more aggressive."
Mr. Long said the company has already broadened its recruiting in xcent years to bring more national-caliber talent to Baltimore.
Alex. Brown has also pushed into new businesses in the past few years, some of which have worked out better than others. Businesses such as asset management and trade-clearing services have treated Alex. Brown fairly well, but a push into the corporate bond world was less kind.
But Mr. Krongard said Alex. Brown stayed away from some of the hottest investment-banking lines of the 1980s. It steered clear of the New York firms' forays into merchant banking, junk bond underwriting and bridge loans, which provide temporary financing for corporate takeovers until the buyers can sell bonds to pay for the deals. That hands-off strategy gave Alex. Brown a reputation among New Yorkers as a second-rate firm.
Alex. Brown executives say they don't want to criticize other people's decisions, but they can be goaded into doing it just a little.
"Do we look smart or dumb for not having been in the bridge loan business like First Boston?" Mr. Krongard said. "We just go slow and steady because we want to be here another 191 years."
Dean Eberling, an industry analyst with Shearson Lehman, however, isn't buying that. "Oh, that's bull," he said. "You had to be of size to get in that game, and they didn't have size. Everyone wanted to do it, and they weren't big enough. Now it fell apart and they were smart.
"They've been aggressive, too. The high-yield bond business is clearly not a conservative strategy."
But whatever risks Alex. Brown took, they were small enough that the company's survival was never in danger during the industry's slow period after the 1987 stock market crash. Mr. Eberling notes that a smaller firm such as Alex. Brown doesn't have the high fixed costs of a big house like Merrill Lynch or Shearson Lehman.
Alex. Brown's earnings fell to 50 cents a share last year and 65 cents a share in 1989 -- from $1.45 a share in 1986 before the crash.
Yet Alex. Brown had so much capital that it was never in danger of going out of business, or even needing a capital infusion from a financial partner, like Prudential Securities got from Prudential Insurance Co. or First Boston received from Credit Suisse, said James Hanbury at Wertheim, Schroder & Co. in New York.
Meanwhile, Alex. Brown cleaned up its cost problems in a bid to position the company to take advantage of the next bull market. Mr. Eberling points out that other investment banks have done many of the same things and also posted much higher profits.
Analysts say the prognosis is decent for the good times to last for a while.
"The principal business will pull back a little," Mr. Eberling said, referring to Alex. Brown's practice of buying and reselling stocks on clients' behalf but with the firm briefly owning the stocks and making a small profit on the trades, a function called "market-making" on the over-the-counter stock market. "But the underwriting calendar is very strong."
He said that if the economy rebounds quickly, as most economists still expect, Alex. Brown could have a very good year. Mr. Long estimates that yearly earnings could reach $2.30 or $2.40 a share.
The trick of managing Alex. Brown's evolution to a public company is to balance the traits Mr. Krongard is talking about when he says the firm wants "Green Berets with squash rackets." He insists they're not mutually exclusive.
Mr. Griswold and Mr. Krongard said the company has planned to shift control of the board to outsiders since 1988. Two outside directors, Rodman L. Drake and former Johns
Hopkins University President Steven Muller, confirm that the move has been in the works before this year and represents the latest stage in an evolution toward public control that began with the public offering.
Outsiders like Mr. Long and Mr. Torray are frankly skeptical of that claim. "Those things don't happen unless there's some dissatisfaction," said Mr. Torray, though he said he wasn't part of any dissatisfied group of shareholders.
The shift in control away from the old partners could become more pronounced when the company chooses a new chief executive officer to replace Donald Hebb, who stepped down earlier this year to return to the firm's investment banking business.
Mr. Drake said the board is "operating with a list of under 10" candidates to succeed Mr. Hebb. Mr. Griswold said the company is looking at candidates from both inside the firm and from the outside and will likely make a choice by October.
But he dismisses the idea that an outside CEO will do much to change the firm's genteel culture. "Whoever that person is will fit into our culture, not drop in from outer space," he said.
It's too soon to know whether the ascent of a new CEO, coupled with the other changes, will mean the end of the Griswold family's long stay at and around the top of Alex. Brown.
Mr. Long, for one, thinks that the family dynasty won't last much beyond the 50-year-old Mr. Griswold's time.
"The Griswold influence on the firm will slowly disintegrate as time goes on," Mr. Long said. "It will become less and less important."
Mr. Griswold, who looks uncomfortable when the topic comes up, said the firm has been independent of the family for years now. He insists he has no idea whether his four children, ages 8 through 19, will follow him into a career at Alex. Brown
"I don't have a clue," he said. But he's clear on one last point. "Would I like it? Yes."