Over the past few weeks Broker Dealers have started to recognize that it is not enough to have a large Broker base with cash reserves and a good reputation. Broker Dealers need to be able to recognize failing ideas before they even get off the ground.
When a firm starts they usually have an idea of the type of Broker that they are looking for and the types of business they wish to conduct. However, as they grow new people come to them with new ideas some of them very good and some of them VERY BAD!
Case in point is the downfall of BrookStreet Securities. BrookStreet was an Independent Broker Dealer headquartered in California with offices across the country which had built a quality firm with a solid, well respected management team. In their quest to be successful they sold CMOs (Collateralized Mortgage Obligations). This sounds like a nice stable product because it has the word “collateralized” in its name.
Unfortunately, this product came with a little thing called “leverage” whereby one was able to “leverage” their investment and buy more of it for less money thereby INCREASING profit potential. This also sounds great until the market changes and in order to lesson exposure you are asked to SEND IN MORE MONEY! We can all guess the ending: “quality firm out of business!”
A firm that is successful over the long term will be able to stick to a game plan regardless of how many “good” ideas and “great” brokers are coming to them. A firm must establish parameters by which they will live. That is not to say that if a firm recognizes an opportunity that they should turn away from it; they should simply fully appreciate the lessons learned from other firms that have built up over many years and then been burned down in a few days.
Keep cool and stick to the plan!