Wall Street Law Blog

Goodbye to Kidder Peabody! WSLB Time Machine Series (brand new!)

Wall Street Law Blog Time Machine: 

October 1994 - January 1995...  

Meltdown in Mortgage-backed Securities was the nail in the coffin for Kidder Peabody.

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129 year old investment bank Kidder Peabody - a Wall Street leader in constructing, selling, and trading mortgage-backed securities  - disintegrated fast in the wake of sudden illiquidity in the market for mortgage-backed securities in 1994. 

Pictured:  1943 Stock Certificate from a Kidder Peabody underwriting

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The following excerpt is from an article that originally appeared in the Wall Street Journal in 1995.  We found the story in the archives of the Seattle Times.

NEW YORK - Another one bites the dust.

Kidder, Peabody & Co., one of Wall Street's longest-running names, will disappear when the investment bank is dismantled later this month.

PaineWebber Group Inc. agreed to acquire most of Kidder's assets in October but wanted to mull over whether it wanted to acquire the Kidder name.

Now, after a six-week "global study" of its retail, banking and institutional clients, PaineWebber has decided that it's time to make the Kidder Peabody name a Wall Street footnote.

"Our research, as well as other considerations, is showing us that PaineWebber is the name to go forward with," said Jerry Johnston, manager of corporate communications. "Now that we are a bigger force internationally, we want to behave as one company, with one voice and one name."

The demise of Kidder will mean the end of a name that has been kicking around Wall Street for nearly 130 years.

Kidder was founded in Boston on April 1, 1865, by Henry Kidder, Francis Peabody and Oliver Peabody. When the firm first opened, it advertised "banking, brokerage and exchange business."

Unlike other Wall Street names, which have gone through various incarnations, the Kidder Peabody name has remained intact throughout the firm's history.

Kidder, long known for its investment-banking prowess, was acquired by General Electric Co. in 1986 and stumbled in a 1980s insider-trading scandal. 

In the 1990s, Kidder rebuilt itself into a Wall Street juggernaut in mortgage-backed bonds. 

But [1994's] sharp rise in interest rates, coupled with a bond-trading scandal, crippled the firm.

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Although the Kidder name had cachet in the late 1970s and early '80s, analysts say today it has little, if any, luster.

"Fifteen or 20 years ago, the Kidder name would have made a difference," said Perrin Long, an independent securities-industry analyst. "Kidder was strong in utility underwriting, it had a crackerjack research department, it had high-net-worth retail clients and a very strong investment-banking franchise."

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In 1994, Kidder Peabody "claim[ed] ... the No. 1 spot for mortgage-backed underwriting..."

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Kidder is the second Wall Street name to be shelved in less than a year. Last May, Travelers Group, parent of brokerage giant Smith Barney Inc., scrapped the Shearson name after Smith Barney and Shearson's brokerage operations merged.

FOR THE FULL ARTICLE, PLEASE VISIT THE SEATTLE TIMES ARCHIVES HERE

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Commentary and editing by Brett Sherman, The Sherman Law Firm

The Mortgage Securities Crash of 1994...

1994 - WHEN MORTGAGE-BACKED SECURITIES TURNED ILLIQUID IN THE BLINK OF AN EYE.   

 

In 1994, the market for mortgage-backed securities crashed.  The ensuing liquidity crisis took down investment advisor David Askin's leveraged mortgage securities fund.  Ultimately, the MBS crisis of 1994 led to massive Wall Street losses and the dismantling of investment bank Kidder Peabody.  

By Brett Sherman

What happened to the lessons of 1994? 

That year, a small and unexpected interest rate hike crippled the mortgage-backed securities market with astonishing speeed.  As was the case in mid-2007, the market for mortgage-backed securities virtually disappeared.  Like 2007, investors holding mortgage bonds lost big, and so did the investment banks that sold them.  

Why do so few of us remember the mortgage securities crisis of 1994?  

Because the MBS market was a fraction of the size it was during the recent housing and credit bubbles. In 1994, most people outside the world of finance had even heard of mortgage-backed securities. But Wall Street knew all about them. In the early 1990's, as in recent years, investment banks booked tremendous profits from the sales of MBS.

How significant could the 1994 crash have been? 

Very significant.  

Before the 1994 crash,mortgage-backed securities /CDOs accounted for roughly one-third of the total US bond market. 

The big three Wall Street producers and sellers of mortgage-backed securities were Kidder Peabody, Bear Stearns, and Lehman brothers. All three firms (as well as many others) took big hits when the MBS market evaporated in 1994. 

Kidder Peabody's mortgage-related losses led to the firm's demise.  Kidder's parent company, GE, shut down the legendary firm and sold off pieces of Kidder Peabody to the highest bidders. 

The crisis also ruined hedge fund manager David Askin. Askin ran a leveraged fund that held mortgage-backed securities. When the mortgage securities market started to collapse, Akin's creditors grew uncomfortable accepting nearly illiquid MBS as collateral for the large loans Askin's MBS fund needed to finance its holdings and stay afloat.   

As the 1994 crisis deepened, buyers for mortgage-backed-securities grew more and more scarce. Askin's creditors issued margin calls.  Lenders demanded more and less risky collateral to secure the loans. Askin could liquidate enough of the fund's holdings to meet these margin calls. 

As Askin's clearing agent, Bear Stearns was one of the fund's creditors that demanded additional and higher quality collateral.  Once it was clear that Askin could not meet creditors' demands, the race to seize assets was on and Askin's MBS fund collapsed.  Reportedly, the first firm to seize assets from Askin's mortgage-backed securities fund was Bear Stearns, then in its second calendar year under CEO James E. "Jimmy" Cayne.

The similarities are striking between the collapse of Askin's leveraged MBS fund and the bankruptcy of two Bear Stearns leveraged MBS funds roughly 13 years later (indeed, the collapses of the Askin and Bear MBS funds were microcosms of the subsequent failure of Bear Stearns itself in 2008).  

Although Bear Stearns and Lehman Brothers were prime players during the 1994 mortgage securities crisis, and had front row seats for the demise of Kidder Peabody, Jimmy Cayne and Dick Fuld apparently blocked out painful memories from 1994.

Why did Wall Street ignore the lessons of 1994?

Maybe it had something to do with immense profits and huge compensation...  Ya think?