Merging to Survive

The wholesale disappearance of brokerage houses that threatened Wall Street in 1969 and 1970 was never averted; it was merely delayed. It began in earnest in January 1973, when stock prices started on a slide that has never really stopped, and daily trading volume sagged beneath the break-even point (generally pegged at 16 million shares a day on the New York Stock Exchange).

Since then, 40 Big Board firms have liquidated or merged, and the survivors have suffered staggering losses--$47.8 million for the 435 remaining N.Y.S.E. retail firms in April of this year alone. Last week it was the turn of one of Wall Street's oldest houses: W.E. Hutton & Co., founded in 1886, confirmed that it was talking merger with Thomson & McKinnon Auchincloss Kohlmeyer Inc.

Running Out. Hutton, like many other brokerages, is suffering from a shortage of capital. Except for a handful of big houses that have sold their own stock to the public, most brokerages subsist on capital contributed by partners and term loans from outside investors; as the loans mature, the outsiders have lately tended to take their money and run. Hutton's partners put another $380,000 into the business in May and negotiated a revised loan agreement with two banks; but even so, the firm last month had less than $1 of capital for every $10 of debts--the point at which the Stock Exchange warns a member firm to act. If the merger fails and Hutton's debt-to-capital ratio climbs above 15 to 1, the firm would face suspension.

Other brokerages also are scrambling for survival. Last month, Blyth Eastman Dillon broke off merger talks with Paine, Webber, Jackson & Curtis, then promptly closed ten of its 55 branch offices and fired 350 employees. Hayden Stone Inc. and Shearson, Hammill are preparing for a merger by Labor Day; reports are circulating on the Street that as many as 1,000 employees will be laid off. Perhaps 100 other firms are talking merger, and the best guess as to how many more Big Board brokerages will merge or liquidate by the end of the year is 50.

No help is in sight to break the trend. Stock prices last week sank to a 1974 low of 791 on the Dow Jones industrial average and closed at 792. Those brokerages that have invested heavily in bonds have been grievously hurt by soaring interest rates, since bond prices go down as interest rates rise; and last week rates went higher still. Several major banks lifted their prime rate to 12%, a figure unimaginable until this year.

Small wonder that there is more gloom --and unemployment--on Wall Street than since the Depression.

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