Question: You've been watching the markets for more than 50 years. Explain their behavior over the past few months.
Answer: We are getting back in the direction of some imbalances. But I'm not on the side of people who say this thing is overblown again, like it was in 2000, and now we're headed for some calamity. I'm more on the positive side of the market.
Q: But with reservations.
A: On the broader economic level, real estate pricing has become a monumental concern. Money is too cheap and available. Mortgage rates are low. California itself is too valuable. It's too nice to live here. If you pay in San Diego, Orange County or Los Angeles three times what you pay for the same acreage and house in Texas, there's a reason for that.
Q: So all the factors out there the budget deficit, the trade deficit aren't going to come home to roost anytime soon?
A: I'm not worried about the real estate bubble at this point. But there are some things that are of concern. There's a stock that just went public, Baidu.com, an Internet search engine stock from China. It went public with 4 million shares at $27 a share and it's been traded at over $100. That's just a little example of how the market is behaving strangely. There's another major change: financials have gone worldwide. The numbers tell us that the amount of foreign exchange every day, measured in U.S. dollars, is $1.9 trillion. It was a fraction of that 10 years ago.
Q: We're all tied to a global economy. That's no big surprise.
A: Well, what that tells me is that no matter how stable we think real estate prices are here, something can happen somewhere else in the world and it could have a domino effect and we could have a dramatic reversal.
Q: Something tied to China?
A: I believe that the potential for China is really huge but it's not going to be realized for a long time. I believe their change in the revaluation of the yuan is probably not that important. Today, China is in the infancy of its capitalism and the 1.2 billion people there cannot take their money out of the country.
Q: You're an investor in Chinese stocks, though.
A: We're an investor in Straszheim Global Advisors LLC in Santa Monica. If you look at Hong Kong's Hang Seng Stock Index, it's at an eight-year low. But Chinese stocks on the Nasdaq like Baidu.com are doing very well. Why is that? It's because the people in China do not trust their government and the stock market. To a Southern Californian like me, China is not much different from Mexico. People used to think Mexico would explode into capitalism, and what they've done is failed because of fraudulent government.
Q: You came to Southern California 50 years ago and initially started working at Hughes Aircraft. How did you go from engineering to stock trading?
A: From a young age, I would go to the library and read everything about stocks and bonds. I would go out and find young engineers who had decent salaries and convince them to invest in mutual fund programs. They would invest $50 a month, or whatever they could afford. While I was at UCLA, I opened an office in the Crenshaw shopping center and called it Wedbush.
Q: Sounds like very humble beginnings.
A: It really was humble. The first year we started the company we had $659 in sales. It was difficult. I had friends and family back in St. Louis, where I grew up, who strongly advised me not to go into the business because it would be a failure. I ended up buying the 35 percent stake that was owned by my partner in 1960 for $13,600, which was money I didn't have at the time. Now the company is worth about $200 million, so I guess it was worth it.
Q: How did you grow?
A: In 1969, there was a well-known firm in L.A., Noble Cooke & Co. and I got a call one day from the head of the company. And he said, "How ya doing kid? I've been thinking of going on a retirement vacation. You got any ideas?" And just like that, I walked to his office downtown and he asked me how much our firm was worth. And I exaggerated by about $20,000, even though we were worth about $1 million. And by Monday our companies had merged and we changed the name to Wedbush Noble Cooke.
Q: You did have some problems with the acquisition of Morgan Olmstead Kennedy & Gardner, which you acquired in 1988. What happened?
A: You can never look back and say something was a mistake. But that one took more blood, sweat and tears out of me than anything else we'd done. They had too many in-born problems. They were careless in their business. Their investment banking business made verbal commitments to do IPOs. We came in as the deep pocket and ultimately got sued. We ultimately put that into bankruptcy and had to work through it over seven or eight years and ultimately paid out 92 cents on the dollar. Morgan Olmstead was a very bad point in our history. But ironically, their headquarters were better than ours so we moved to this building.
Q: How bad was the 1987 market decline?
A: That was worse than 1929, in my opinion, because of the amount and rapidity of the sales, day after day. We found most of those calamities were an opportunity. You really do have to remember that for everyone who is selling, someone is buying.
Q: Other firms set out to be regional but Wedbush didn't. Why is that?
A: We've always been market makers, specialists on exchange floors, and ultimately we became specialists on the Nasdaq. We put our own workers on the New York Stock Exchange floor. We went ahead and did our own business ourselves by becoming a member of the information structure, as opposed to just becoming a member of the New York Stock Exchange. I would have to say that was the most strategic decision I made, becoming part of the structure of trading.
Q: That goes to the heart of your correspondent clearing services. Wedbush clears 3.5 billion trades every month.
A: It does sound like a lot but it's very important to understand that at least three-fourths of that comes from what we call black box trading, which is purely computer initiated trading, as opposed to servicing individual investors. So the computer may buy and sell the same stock every few minutes throughout the day. We're ranked second in the country for black box trading on the Nasdaq.
Q: Explain how that works.
A: The trades are coming from every source imaginable, from the smallest and largest brokerage firms. And they're going into an electronic communications network and they are hitting the bid with the sale order or they're taking the offer with a buy order. That bid and offer is provided by the black box, which our firm is the corresponding clearing firm for. It's really run by a small group of traders, probably 20 or 25 in the country. And we have three of the traders using our services. We've been in the top 10 list for the last year and we're at No. 2 right now.
Q: How did you get into it?
A: We went into the corresponding clearing business in 1972. We started clearing for other firms. This means customers from other smaller brokerage firms use us for execution and clearing services. The firm puts their orders through us. The computerized trading services just began a year and a half ago so it's relatively new.
Q: What is a typical day for you?
A: I get up at 4:30 a.m. in the morning and get to work by 5:45 a.m. I go home anywhere between 3 p.m. and 6:30 p.m. with a full briefcase. I work at home until 8 p.m.
Title: Founder, President and Chief Executive
Company: Wedbush Morgan Securities
Born: 1932, St. Louis
Education: B.S., University of Cincinnati; M.B.A., UCLA
Career Turning Point: Agreeing to go with a friend to interview with Hughes Aircraft, which led to graduate school at UCLA
Most Admired Person: Harry Truman
Personal: Married, three children, eight grandchildren
Hobbies: Work, spending time with family
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