Doubled-Edged Sword Handed to Brokerages : Big Commissions Now, but Ominous Future

NEW YORK —  In just three work days, Drexel Burnham Lambert has “given back all of October’s profits and then some,” said Robert E. Linton, the New York investment firm’s chairman.

But in those same three days, commission income at Bateman Eichler, Hill Richards in Los Angeles has risen 75%, said Executive Vice President Thomas Adkins.

For the nation’s brokerages, the turmoil that has taken the stock market to record swings in each of the past three trading days is clearly a double-edged sword.

“Yes, many firms are benefiting from a tremendous surge in commissions business. But when this stops, who knows if investors will be so shellshocked that they will stand on the sidelines for months or years, and then some of these firms would have to face some very difficult business decisions,” said Perrin Long, a brokerage analyst for Lipper Analytical Securities.

For some firms, the time for difficult decisions has already arrived.

First Victim

H. B. Shaine & Co., a 30-year-old brokerage firm in Grand Rapids, Mich., on Tuesday became the first victim of the biggest stock market crash in history. The firm, which employed 92, was so overwhelmed by trading losses stemming from Monday’s historic 508-point decline in the Dow Jones industrial average that it wasn’t able to open its doors Tuesday. A trustee was appointed late in the day to settle the firm’s accounts and notify customers.

Hugh Makens, outside counsel for H. B. Shaine, said the firm wasn’t experiencing financial difficulty before Monday’s market crash. But he wouldn’t elaborate on the precise nature of the problems except to say that they didn’t result from trading for the firm’s own account.

In New York, a specialist unit of the W. Damm M. Frank & Co. investment firm was taken over by Bear, Stearns & Co. after the specialist, which handled trades in 30 stocks and three options, experienced a capital squeeze. And three or four specialist firms required capital help from the New York Stock Exchange, according to NYSE Chairman John J. Phelan.

Wall Street has been particularly concerned about the fate of specialist firms because these firms are obligated in falling markets to buy shares in order to maintain an orderly flow of trading. To finance their inventories, they usually must borrow money; with this high leverage, they are more susceptible to financial ruin during a crash.

Two small New York firms that make markets in over-the-counter stocks were said by regulators and market analysts to be on the brink of insolvency. Both firms answered their phones Tuesday but executives refused to discuss their financial condition.

There also were “some tricky situations” among firms specializing in over-the-counter stocks, according to an official of the National Assn. of Securities Dealers, which was monitoring its member firms’ capital positions all day Tuesday to ensure that all had sufficient capital to cover their obligations.

But none of the more than 6,700 NASD member firms are insolvent or have “significant problems that we know of,” NASD President Joseph R. Hardiman said.

Another Beating

Over-the-counter stocks, which are typically low-priced shares, took another beating Tuesday. The NASDAQ composite index fell 32.42 points to 327.79 while the Dow Jones average of 30 blue-chip stocks rose 102.27 to 1,841.01.

Although smaller brokerage firms have taken the brunt of the damage so far, market analysts say they are also worried about some poorly capitalized mid-size and large firms--particularly those with large arbitrage departments and those that conduct large amounts of trading for institutional investors. Both have been particularly hard hit since late last week.

“The chairman of one such firm told me today that if we see another 300-point (down) day, followed by a 200-point (down) day, his firm is history,” said Long, the Lipper analyst. “He’s heavy both in arbitrage and institutional equities.”

Rumors circulating on Wall Street and in foreign markets Tuesday demonstrated that investors don’t consider even the largest investment houses as immune from financial disaster in this turbulent market.

E. F. Hutton, Shearson Lehman Bros., Salomon Bros. and Goldman Sachs all issued strong denials Tuesday after rumors persisted that they are on the brink of bankruptcy. Hutton’s denial was the second in as many days.

Robert P. Rittereiser, Hutton’s chief executive, even took the unusual step of assuring employees over the firm’s internal broadcast network that Hutton is having no operating or financial difficulty.

His comment did little to calm investors, however. The stock lost $6.375 on Tuesday, falling to $16.75 a share.

Biggest Disasters

It was “one of the biggest disasters” of the day, said Eugene D. Peroni, an analyst for Janney Montgomery Scott in Philadelphia. Most other brokerage stocks rose slightly.

Despite persistent rumors of serious trouble at some of the big firms, however, “I really don’t think any of the majors have been hurt substantially,” said Brenda McCoy, a brokerage analyst with Paine Webber. “You have to remember the equity market has been weak, but the bond market is very strong and most of the big firms are more active in fixed income than in equities.”