Safeguarding Your Money

It seems like there's a complete lack of confidence in government and financial leaders. Do you think there's good reason to trust that they're doing what they have to do?
I think yes, because there's constant evidence of their willingness to do more. Today, there were already three announcements on the Federal Reserve Web site. They're not being dissuaded because the numbers are getting large. It's like Texas Hold 'Em, in that the scale of the bets can get big real fast and people get scared out. They're not getting scared out.

How much is Brown Brothers feeling the pinch? Why have you been unscathed compared to other banks?
The pinch has been minimized because we didn't get involved in the risky areas to begin with. As a commercial bank, we don't underwrite securities, which is what caused most of the problem for the big investment banks. Brown Brothers didn't get from 1818 to today as a partnership by taking extreme risks. There is a longer-term view here. Because we don't have stockholders to report to and we don't have to make quarterly profits, there's not this need to look good for each quarter and deal with the consequences later. There's a culture of conservatism in business dealings that emanates from the structure of the firm.

But you're not completely insulated, obviously.
Of course not. We manage people's money and the markets are down, so we feel it that way. We are a very big custodian firm for mutual funds and other banks. So we have to be prepared for things to slow down some, for profits to be less. But we as a firm never got involved in things like credit derivatives and subprime mortgages. So we didn't get the upside, but we don't get the downside. Our cycles are much more muted than many others'.

Is there a lesson in that? Or is that something that's only affordable if you're starting out with $10 million, as many of your clients do?
On this side of the cycle, it's easy to say that everyone should have done what we did. The Brown Brothers model is not the prescription for everybody. Having said that, it's easy to say now that the very aggressive firms had too much leverage. Somewhere between where we are and always have been and where they ended up, there's a more normal operating style, which will come back.

So it's just that the median shifted too far in the other direction?
It certainly did. With the decision to allow the big investment banks to increase their leverage in 2004, the same loss they once might've survived became much more threatening. But it will take years to know what the lived reality of the changes in the financial system will be like.

© 2008