8 – Operational and Accounting Support – 1893 to 1984
8 – Operational And Accounting Support – 1893 to 1984
A chronicle of the development of the A.G. Becker & Co. organization over its life of some 90 years is not adequate without strongly emphasizing and acknowledging the daily work of a wide range of employees involved in all the “operational and accounting” activities of the firm. This portion of a securities firm’s business was often referred to as the “back office.” In the author’s judgment, these organizational capabilities and functions within the Becker organization were relatively more important to Becker’s growth and success over the years, than in the case of most “Wall Street” or “securities” firms. They deserve a special summary description, and a special “salute.” Let’s stop a moment and do that.
Cost and Profit-Center Accounting
As noted earlier in the Chronicle, the firm began to do detailed operational, profit-center planning and reporting in the late 1960s. The soundness and dependability of these “internal service” procedures would not have been possible without the “can-do” competency, discipline, and culture of the operations and accounting staffs which were put in place starting in the 1950s.
Overall, when reviewing the Becker story almost from its beginning, certainly over its last 40 years, and particularly over the high-growth years 1970-1984, the diversity of the firm’s services was a key part of Becker’s strategy. The development of operational and related accounting support for such diversity was a key asset to the firm’s success. All those involved should be proud of the important contribution they made.
The operations support of the oldest part of the firm - the commercial paper business - was vital to its success over the years. From the very outset of this business, the operational tasks for dealing in commercial paper were very specialized. The nature of the business centered around a physical document encompassing an evidence of indebtedness, a maturity (in a short term range), a face amount, and then a transaction value which was a discount from the face value (and thus the document did not express an interest rate). This was a custom document. For many years, these “pieces of paper” were moved from an issuer (or issuing agent), to a dealer (or its agency bank), to an investor or its agency bank, and to a payment agent, with other steps in between if the paper was purchased and resold by the dealer before maturity. On maturity and payment when due, the document was stamped “canceled on payment” and returned to the issuer. Later, the actual commercial paper (document) began to be an electronic entry in various bookkeeping registers, but even then, the issuer’s and dealer’s bookkeeping were central to this whole process.
Other Fixed Income Instruments
Later on, as described earlier, Becker moved into various other segments of the overall “money market” business -- dealing in FNMA notes, certificates of deposit, bankers’ acceptances, Treasury bills, and tax-exempt tax warrants and notes -- and the bond markets -- dealing in U.S. Government notes and bonds, plain vanilla taxable corporate and tax-exempt municipal bonds, a range of U. S. Government agency and guaranteed bonds and other hybrid instruments -- the operational and “trade clearance” support tasks became even more specialized and more integral to the marketing and client services dimension of the business, and ultimately to customer satisfaction.
In most all “fixed income” business activities of a securities firm, as just above described, the firm acted as “principal". It purchased and sold securities into and out of inventory, and made a profit or realized a loss on the difference between the cost and selling prices of securities purchased and sold. But then, also, the firm experienced on an accrual basis an unrealized gain or loss on the market value of its inventory, and had a direct cost in the interest expense of carrying such inventory. Thus, all this aggregate of realized transactional gross profits and losses, combined with unrealized gains or losses, resulted in aggregate gross profits from which could then be deducted carrying, marketing and operating costs, to determine whether there was any net income, and return on capital, for all of this transactional activity.
Exchange Traded Securities
The operational support required for exchange traded securities - especially common stocks - was quite different than the procedures supporting dealings in principal-traded fixed income instruments. The largest portion of most firm’s equity business would be “stock exchange” transactions, in which business all trades are among members of the exchange and are “cleared” through each exchange’s clearing corporation. Further, in most all stock exchange business, the investment firm (exchange member) is acting as “agent” and the basis of its compensation is a “commission.” Becker entered this business in scale in about 1945 and at that point began to have the need for a quite different support system than was developed over the prior fifty years.
The operational and accounting activity of any one firm in the stock exchange business involves an interface with that single clearing unit, as opposed -- in fixed income securities transactions -- to clearing and settling every trade with a counterpart dealer, and often through an intermediary service organization. In the case of commercial paper and certificates of deposits, the issuers are in many cases involved. On the other hand, in the equity business, thousands of different common and preferred stocks are potentially involved, and business is carried out through a variety of exchanges, including, quite differently than “stock”exchanges, the Chicago Board of Options Exchange. So each type of exchange traded securities business had its own complications and exchange rules.
Over-the-counter Traded Securities
The complexity of exchange based operational procedures, broadly required for all those in the “stock exchange business", was increased by the procedures of the “over-the-counter” stock transactions business. This business was in fact that which Becker engaged in the 1915 period all they way forward to 1945 when the firm joined the NYSE and then later, other exchanges. The OTC stock business was a combination of principal and agency business; the early operational support was based on dealer-to-dealer settlement, later supplanted by a clearing corporation. For many years, this activity required a separate department within the firm’s operations division.
Investment Dealer Services
The firm developed over the years an excellent level of highly selective personal account stock business, and some high quality institutional stock business with exceptional block and broad scale execution services, all requiring competent, timely, and reliable transactional support. But, as we know from the earlier description of Becker’s various activities, the firm created, starting in the 1950s, a fairly large scale “business” comprehensively servicing the execution, processing, and clearing needs of a wide range of other investment dealers, US and foreign. As members of a number of national, regional, and specialized securities exchanges, a wide range of firms executed orders on the exchanges on behalf of their clientele or the firm’s proprietary account. The amount of business done on the regional exchanges was relatively small for any one dealer, but all together, was substantial. Combined with Becker’s specialist operations on all the regional and special exchanges, the firm began in the 1960s to create a sizable floor brokerage, clearing and settlement business involving a large number of dealer clients. By 1980 the firm had achieved a leading “market share.” The business was “operations intensive,” not an activity or service many other firms were interested in taking on. The Becker network of exchange personnel also became the foundation for a national institutional execution capability in the 1970s-80s. In this “business” Becker was therefore in good part turning into a profit center the very specialized, multi-exchange operational capability which most everyone else in the industry would have considered a “cost of doing business.”
Specialist Clearing and Accounting
Finally, in 1980, Becker’s operations personnel developed a further specialized capability when the firm entered the stock exchange specialist clearing business. This was done through the trade name “Beckco,” under Don Messemer’s management. This capability was based on part on the firm’s long standing business as a specialist on regional exchanges, and the “internal” clearing that was involved and know how that was developed. This operationally intensive service also had its roots in the firm’s CBOE market maker clearance business going back to the early 1970s.
Funds Performance Evaluation
Many of the services Becker created, and particularly the pioneering development and steady expansion of the funds performance evaluation services, involved programming, data processing, report design, printing and assembly -- all “operations” functions which were integral to the nature and success of each FES service. Operational support was a part of each service component.
Other Data Services
Looking back, Becker was regularly creating small, but valuable, unique, and focused services, such as MARKSCAN, PMA, Commercial Paper Program, Finance Company Statistical Report, and BANKDATA. Each of these services had its own unique market niche and a common requirement for accuracy, good design and formatting, printing (usually), attractive packaging, timeliness, and client customization. The information provided in each service became a factor in decision making within each client's organization. Here again, the importance of well trained, knowledgeable, client-oriented, non-clock-watching staff cannot be overstated.
Becker’s accounting and operations support personnel were vital -- and inadequately recognized -- contributors to the Becker success. Among those involved, over the years, were:
The “old-timers:” Carboni, Denning, Egger, Elsholz, Fleming, Furlong, Link, Sachweh, and Stuart.
And then also these: Battaglia, Burman, Coffey, Leser, Littau, Marshall, McCausland (A), Messemer, and Porzio.