Ferris Baker Watts Inc. has become one of the latest institutions to take a financial hit from the subprime mortgage crisis, disclosing a $7.4 million loss on debt securities purchased by a bond trader who has since been dismissed.
The Baltimore brokerage's chief executive, Roger L. Calvert, disclosed the loss and the circumstances surrounding the trades in an internal memo to shareholders of the employee-owned firm. Ferris spokeswoman Robin Oegerle declined to comment on the memo and on what she called "personnel issues."
The memo "speaks for itself," Oegerle said. "It's a confidential memorandum to the shareholders. We are not going to discuss it. We are a private company."
According to the memo, Ferris plans to virtually write off the securities' value on its financial statements for October, and its net capital already reflects the loss.
While the company's net capital fell more than 30 percent during the first nine months of this year, Calvert said in the memo that the firm remains "strongly capitalized," with $46 million beyond what is required by regulators.
The subprime-related loss comes as Ferris tries to recover from a stock-manipulation scheme that company executives have portrayed as the work of a rogue broker and client who have both pleaded guilty to criminal charges.
Six top employees were placed on temporary leave during an internal investigation and three, including former CEO Louis J. Akers, subsequently retired or resigned. Federal regulators have yet to conclude their investigation of the case.
The spreading subprime mortgage meltdown has rippled through banks, securities firms and other financial institutions that have announced tens of billions of losses in recent months. Some analysts estimate that the current credit crisis could cause $400 billion in losses for companies with investments exposed to subprime loans.
In the past month, Wall Street titans Merrill Lynch & Co. and Citigroup Inc., for example, have written down $8.4 billion and $5.9 billion, respectively, from subprime mortgage holdings and other instruments.
"There has been just a massive failure throughout the system to do appropriate risk management," said Albert S. Kyle, a finance professor at the University of Maryland's Robert H. Smith School of Business.
"At this point, we don't fully understand where all the losses will be," Kyle said. "As we approach the end of the year, when companies are required to make financial disclosures, they are going to be pressured by their accountants to write off losses they have incurred."
Ferris' Calvert noted in his memo that most debt instruments related to subprime mortgages had been dubbed investment-grade by credit-rating agencies and that those agencies, including Moody's and Standard & Poor's, only recently downgraded "essentially all" fixed-income securities containing subprime loans issued in 2006.
Ferris acquired two positions in debt securities that contained subprime loans in March, according to the memo, even though managers had told employees not to purchase that type of security unless there was an immediate customer demand for it.
The managers fired the bond trader for violating those instructions and tried to sell off the securities. But by the end of that month, the market for such securities had collapsed, the memo said.
While the bonds Ferris holds are not in default, managers in the fixed-income department anticipate that rating agencies will soon downgrade them.
So executives decided to reduce the value of its positions on its books to 1 percent of the face value, essentially counting them as worthless, even though the bonds could have some value in the future.
Kevin Rast, head of the fixed-income department, declined to comment yesterday for this article.