THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Thursday, September 1, 1994 TAG: 9409010562
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
DATELINE: NORFOLK LENGTH: Long : 111 lines
The 11th floor of the NationsBank building has been spared the shock waves rippling through Kidder, Peabody & Co. offices elsewhere in the country.
But pressures on the brokerage firm's Norfolk office are building. And some brokers in the office are being courted aggressively by rival firms.
Adverse publicity about fictitious bond trading at Kidder's New York headquarters and losses on its portfolio of volatile mortgage securities has prompted departures of brokers and clients from several Kidder offices around the country.
Even though their clients' funds were not at risk in the government-bond trading scheme, Kidder brokers have had to spend their time reassuring clients rather than generating new business, said brokers at rival firms in HamptonRoads.
More importantly, Kidder's brokers are not sure that the torrent of bad news has ended, said a veteran broker with another firm in Hampton Roads. ``Headhunters,'' he said, ``are calling and asking, `Aren't you ready to leave yet?' ''
Eric E. Thompson, manager of Kidder's Norfolk office, said his branch has not lost any brokers since the bogus bond-trading scheme came to light in April. And the volume of client assets handled by the Norfolk office has continued to grow.
But Thompson acknowledged that some of the 26 brokers in his office are being coaxed by other firms to defect: ``They are getting pinged by everybody right now.''
Because it is costly to replace talented brokers, ``retention is at the top of the list'' of Thompson's concerns.
To counter the unfavorable publicity, he has held more frequent meetings with his brokers, answered more phone calls from nervous customers and sought to reassure lawyers and accountants who can recommend Kidder's estate-planning services to their clients.
Also, he has stepped up efforts to promote the firm's name through advertising and sponsorship of cultural events.
The wave of bad publicity began building in April when Kidder, a subsidiary of General Electric Co., alleged that the head of its government-bond desk had produced $350 million of phantom profits over a two-year period through fictitious trades. In the process, bond-trader Joseph Jett had masked heavy losses on these trades, the firm contended.
Jett, who received $9 million in salary and bonus last year and was named Kidder's employee of the year, was fired in April. Gary Lynch, Kidder's outside counsel and former enforcement chief of the Securities and Exchange Commission, was brought in to investigate the circumstances of Jett's trading activity.
By late June there was more bloodshed. General Electric also replaced Kidder's chief executive officer and chief operating officer with two veteran GE executives.
However, clients of Kidder's Norfolk office have been more concerned about news reports of the firm's financial condition than about the bond-trading scandal, Thompson said.
In mid-June, The Wall Street Journal published a lengthy front-page story that began: ``Kidder Peabody Group Inc. is on life support.'' The story went on to compare Kidder to Drexel Burnham Lambert Inc., a high-flying securities firm that crashed in 1990 after a lengthy SEC investigation uncovered insider-trading by Drexel officers, traders and brokers.
Although Kidder has had a lower percentage of capital to assets than some other securities firms, the Journal's ``life support'' analogy was wildly erroneous, insisted Thompson. ``Our regulatory capital was always sufficient,'' he said.
In recent years, Kidder has become a dominant trader of mortgage-backed securities, a position that provided the firm with hefty profits when interest rates were falling. But some types of mortgage-backed securities, known as collateralized mortgage obligations, became very risky when interest rates began climbing earlier this year and investor interest in these securities dwindled.
To protect Kidder's financial health and cover losses attributed to Jett's bond trading, GE injected $200 million of fresh capital into the firm. Kidder Peabody Group Inc., the firm's holding company, provided another $350 million of capital. Despite the damage-control efforts, an exodus of brokers was already under way.
Since Jan. 1, the firm has lost 45 brokers and $2 billion of client assets to rival firms, said Anthony Zehnder, a spokesman at Kidder's New York headquarters. However, some of those departures were routine, and ``the turnover (among Kidder's brokers) remains below the industry standards,'' Zehnder said.
Kidder has 1,236 brokers and 50 offices around the country.
What has complicated Kidder's efforts to hold onto brokers and clients is speculation that its disgruntled parent is preparing to sell the firm.
Thompson, who keeps a corporate history of GE on a table in his office, expressed doubt that a sale would occur in the near future.
GE, he noted, has invested more than $1 billion in Kidder, an amount that will take time for GE to recoup. And under its new chief executive and chief operating officer, Kidder is likely to benefit from having a closer relationship with GE's highly profitable financial-services subsidiary, GE Capital, Thompson said.
Having to address the concerns of brokers and clients has not kept him from seeking a new lease for Kidder's Norfolk offce and expanding the firm's Richmond office, Thompson said. Kidder, he said, has had no difficulty attracting qualified candidates for positions in the Richmond office, which he expects to expand from 8 brokers to 12 by yearend.
In Norfolk, he is seeking a lease with an option to expand its amount of space from 11,553 square feet to 14,800 square feet by late 1996, Thompson said.
Despite Thompson's optimism about the future of Kidder, the Lynch report on phantom bond trading pointed to problems the firm still has to address. The 86-page report, released in early August, criticized Kidder's management for lax financial controls and poor supervision of the firm's government-bond trading desk.
``There's no way to excuse it away,'' Thompson said of failures described in the report. ``It's an embarrassment.'' by CNB