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Business Observer Friday, Mar. 12, 2004 18 years ago

Half a Day with Dick Bove

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Live from Pinellas County, one of America's most-quoted bank analysts wants to see if independent stock research, free of ethical entanglements with stock underwriting, is still feasible.

Half a Day with Dick Bove

Live from Pinellas County, one of America's most-quoted bank analysts wants to see if independent stock research, free of ethical entanglements with stock underwriting, is still feasible.

By Francis X. Gilpin

Associate Editor

Richard X. Bove gives his readers a seldom-seen take on selected business developments at a distance from Wall Street. Henry Blodget does something similar. But the two men operate the way they do now for vastly different reasons.

Blodget comments online about the 1990s corporate scandals that dominate criminal dockets at various Manhattan courthouses. Nobody questions his expertise. Blodget is banned from the securities industry for tailoring his bullish reports on '90s tech stocks to the investment banking demands of Merrill Lynch & Co., where he used to work.

Bove, on the other hand, spends most days at his Pinellas County home writing insightful and provocative reports on bank stocks for clients of San Francisco investment boutique Hoefer & Arnett Inc.

"I'm an experiment, so to speak, for them," says Bove.

H&A's investment banking revolves around micro-cap stocks. Bove tracks 46 financial services companies, none fitting the under-$250 million market-capitalization category. "I don't even like to follow small community banks," says Bove.

Thus, Bove says he is free to say exactly what's on his mind. With 25 years of experience, he looks at the future course of American banking thorough a macro-economic lens that lately has been downright frightening.

"In theory," Bove says, "analysts become analysts because they like to pit their knowledge against the stock market and hope they make money by playing that game, right? You can't do that, if you work in corporate finance."

His resume proves the point. Bove has been fired from three research jobs since 1982. One dismissal, he calmly recounts, was because he turned in his own employer to the federal Securities and Exchange Commission.

H&A hired Bove almost three years ago in the hope that his long association with institutional investors and regular appearances on CNBC, Bloomberg television and the financial pages of national publications might bring in new business.

How's it going so far?

Bove says he makes as much as did at his last job, as a senior vice president at Raymond James & Associates Inc. That is, if the enormous bonuses from the St. Petersburg brokerage's corporate underwriting are excluded.

"The broader experiment is whether you really can get paid for doing pure research," Bove says. "While everybody says that's the way the world should work, there's no proof the proposition will work."

Squawk box

On a recent weekday morning, three casually dressed fellows filed into a room at one end of Bove's house. They are H&A's Florida sales force. Two of them also happen to be Bove's sons.

The sports memorabilia and Britney Spears pinups adorning the room testify to the youthfulness of the salesmen. Dick Bove started out in sales himself almost 40 years ago. "You can make a lot of money on Wall Street," he says. "The guys in there may be working out of a little shitty office, but they're all making over six figures."

The Bove crew has assembled for a 9 a.m. sales conference call with H&A offices around the country. Like the daily ritual at other investment firms, analysts tell brokers what they've heard in the past 24 hours.

One analyst briefed the speakerphone contingent on a presentation the previous day by a West Coast bank attempting to broaden its customer base beyond Korean-Americans.

But Bove dominated the call, talking from his office at the other end of the house. In recent days, he did some Internet eavesdropping on a Raymond James investment conference in Orlando.

Wells Fargo & Co. traveled all the way to Florida to predict it should be cross-selling an average of eight financial products to most every one of its customers within a few years. Another disembodied voice expressed skepticism. Bove agreed the San Francisco bank might be promising too much. But he reiterated a "strong buy" for H&A clients.

Later in his office, Bove says he hasn't seen esprit de corps like Wells Fargo's since Barnett Bank. "Barnett had a group of people working for it who totally believed in Barnett. The Barnett way of doing things, that they were Florida," he says. "And NationsBank comes in and fires 10,000 of them and destroyed the whole goddamn - it destroyed that bank. It was pathetic, what they did to that bank."

When examining individual companies, Bove says one factor he looks at is people - who works there and how do they feel about the place?

"The primary reason why we're recommending Wells Fargo, despite the fact that their mortgage business is going to fall apart, is because those guys believe in that company like you can't imagine," he says.

The last three years have been euphoric for American banking. Deposits grew as investors stayed away from the stock market. Banks couldn't write mortgages fast enough with the record-low interest rates. Home-equity lending soared with property values. Automobile shoppers were everywhere, seeking a loan, as car dealers dealt.

But Bove has been beside himself of late. With those trends expected to reverse this year, he cannot believe the expansion that banks, especially in Florida, are undertaking at peril to their shareholders. "All of the things that caused the profits are gone," he says, "but they're still building branches."

Washington Mutual Inc., a huge Seattle thrift, is entering the Tampa retail market with 40 new offices alone. "Everybody wants into Florida," he says. "Bank of America is going to try to recapture some of the market share that it lost when it destroyed Barnett. So they're building a bunch of branches in the state."

Wachovia Corp. is advertising heavily. AmSouth Bancorp and SouthTrust Corp. are still opening branches to stay competitive with the universal banks.

The losers will be banks like BB&T Corp. that are struggling to find a profitable opening into the Sunshine State, according to Bove. "They did pay this outrageously high price for Republic," he says, referring to the pending acquisition of St. Petersburg's Republic Bancshares Inc. "You've got to take your hats off to Republic management and you got to wonder if BB&T has any sanity left."

Or whether Floridians truly need more bank branches in which to deposit their money. "Maybe there's enough business here," says Bove. "I don't think so."

Growing up on welfare

Bove speaks with the trace of a Boston accent while wearing a Yankees baseball cap around his $650,000 house in a gated golf community.

That's because the Pinellas Park resident was born in Massachusetts 63 years ago. The Bove family moved when he was young. Both parents were idled by a ghastly string of illnesses, from emphysema to cancer, that sent his father back to his native New York City for the charity of relatives.

The family still needed to go on the government dole. Bove aced competitive exams to win admission and free tuition into elite Stuyvesant High School and Columbia College, with student loan help at the latter.

"This is a fabulous country," says Bove. "You can be a kid on welfare and there are things in place in this country that will give you everything that the richest kid in America is getting."

A political science major at Columbia, Bove learned all he knows about the business world after his 1962 graduation. If he came across anything he didn't understand during his early Wall Street days, Bove walked down to the New York University business school. He'd buy a textbook on accounting, finance or whatever he needed to learn. "That's how I educated myself," he says.

After briefly selling insurance, Bove switched to stocks in 1965 before settling into equity research, eventually working for firms like American Express, CJ Lawrence, Dean Witter and Werthheim & Co.

"I wanted to be an analyst because it was too tough to be a retail salesman," he says. "It was brutal because I came from a welfare family. So I had no connections."

Without rich uncles, Bove had to make 100 calls a day to find one stock buyer. By the end of the week, he'd have five. By the end of the year, he'd have a book of clients. Then, in 1967, the market turned down.

"I was selling a lot of mutual funds and stock options because that's where the highest commissions were. I lost half the book," Bove says. "So I had to start all over again. Then, the same thing happened in 1970. I couldn't stand it anymore."

For most of the 1970s, he followed the homebuilding industry, which was flush with Great Society-inspired federal subsidies. Widespread fraud and the end of the Baby Boomer demographic's starter-home phase persuaded Bove to shift his focus to financial services.

Bove eventually worked his way up to research director at a Wall Street firm. But he was dismayed to find his profession wasn't much cleaner than the urban development rackets of the '70s.

"In the mid-1980s, in my view, there was more illegal activity in this business than anytime ever, since the 1920s," he says. "I don't think what happened in the 1990s comes close."

He decided to drop a dime to the SEC. "My theory was that it was so blatantly illegal that, if I didn't act, I was going to be thrown in jail," he says.

In the case of his firm, Bove had nothing to worry about. The SEC didn't lift a finger to investigate his complaint, he says. But he was terminated from the firm for his trouble.

Wall Street shuffle

Bove has worked uneasily within the American system of high finance. He has made millions of dollars. Yet his career has also given him a front-row seat to astonishing levels of entrenched corruption. Bove says he is skeptical that occasional reformers like New York Attorney General Eliot Spitzer alleviate it for long.

The parallels between Spitzer and an earlier dashing prosecutor with political ambitions, Thomas E. Dewey, are unmistakable. "Eliot Spitzer is doing a phenomenal job," Bove says. "Ultimately, he will become governor of New York, I would assume. The guy who replaces him will not have the same fervor."

Bove doesn't care what motivated Spitzer's crusade against an investment business that seems to take habitual advantage of its smallest and least sophisticated customers. "He may be as political an animal as people in the business argue that he is. But so what?" says Bove. "If a guy sees a political advantage in grabbing an issue and it happens to be a valid issue, that's how it's supposed to work, isn't it?"

In some respects, though, Bove says Spitzer has gone too far. Like forcing mutual fund companies to lower their fees. "I think that's socialism," says Bove.

Not only that, but Spitzer and the SEC are creating unintended consequences. Maybe mutual fund fees were indefensibly high. But some of those fees paid for research that benefited small investors. Stock analysts shouldn't have been shilling for their own firm's securities offerings. But what has separation of research and investment banking done?

"The government has now said there is no money to pay for research from corporate finance," says Bove. "So who the hell is going to pay for research?"

Do-it-yourselfers are flocking to E*Trade and other online discount brokers. The only trouble is that $10 a trade doesn't buy much research help. Individual investors are more likely than ever to be working from market intelligence woefully inferior to that of bulk traders.

In other words, Spitzer and the SEC, in the name of leveling the playing field for little investors, are actually tipping it further in favor of the institutions.

A day after Bove noted this irony, The Wall Street Journal published a front-page story headlined: "Increasingly, Stock Research Serves the Pros, Not 'Little Guy.'"

The Journal and Bove say seasoned analysts are moving into money management and investment banking. There, ex-analysts have a chance at the rich compensation to which they'd grown accustomed before the regulatory crackdowns.

"I think research is dead," says Bove. "There's no pool of money to pay for it anymore."

Bove sees his flier at H&A as a last gasp. Sure, H&A sells his insights to hedge fund and mutual fund managers. But 60% of the firm's brokerage activity comes from retail accounts.

"That's what this experiment is all about. If I survive, it means there is enough money to pay for it," says Bove. "If I don't survive, it's questionable."

Propping up the US economy

An anxious client interrupted Bove with a telephone call. Deutsche Bank stock was supposed to have stopped trading on a German exchange before the European markets closed. Rumor has it that Citigroup is renewing a bid for Germany's biggest bank.

Bove told the caller that Citigroup takeover speculation was rife in February, but German Chancellor Gerhard Schroeder probably blocked the deal. The Germans don't look upon globalization as benignly as other Western democracies.

Long term, buying Deutsche Bank would be a great move for Citigroup. But Bove tells the caller that he doesn't see it happening.

Nevertheless, after hanging up, Bove strolled to the other end of the house to apprise the H&A salesmen. Half-hour later, Andy Massey, the lone non-Bove in the sales room, brought over a printout of a CBS Marketwatch report claiming Citigroup had made a 90 euro-a-share offer for Deutsche Bank.

Dick Bove told Massey that it wouldn't hurt to alert H&A clients. "I'll call the hedge funds," Massey replies.

Another 30 minutes passed. In the sales room, Joe Bove was still rapid-firing messages into voicemail boxes. Eyeballing a phone list on his computer screen, Joe Bove decided to skip a number. "I guess I won't call Deutsche Bank on this one," he says, laughing.

After most of the calls are out, Dick Bove returned with an update. If Deutsche Bank ever stopped trading, the stock had resumed activity in the after-hours market. That meant, Bove says, it was doubful that Citigroup made another play.

Indeed, Reuters quoted an unidentified source the next day debunking the rumor. Likewise, Bove stomped on a possible Citigroup-Deutschbank union in a subsequent report to H&A clients. "We think it is unfortunate that this deal is likely to never happen," he wrote. "This smoke will not burn."

Bove cannot be deaf to rumors and market run-ups. But he pays closer attention to the big picture than speculators, individual banks or call reports.

"Banks don't determine what the economic cycle is going to be. They don't determine what the shape of the yield curve is going to be," he says. "Those are the things that determine whether stocks are going to go up or down. What the specific company earns is almost irrelevant."

The "world environment," as Bove calls it, is where the harbingers reside. "My world environment, at the moment, is scary as hell," he says.

A deficit hawk of the first order, Bove says the Bush administration is spending the nation into economic catastrophe. Chinese and Japanese investors hold as much as $1 trillion of U.S. debt obligations, purchased with dollars accumulated through trade surpluses. But foreign investors are nearing a point of diminishing returns, Bove says.

"The US will do everything possible to avoid dealing with this issue, unless they're forced to," says Bove. "What I'm arguing is, they're being forced to. Because, if China says, 'we're going to sell $200 billion worth of our Treasury bonds,' that's a crisis for the United States."

The results could include 1970s-style stagflation, with high interest rates and low economic growth. "The United States has weakened itself dramatically," says Bove, "allowing itself to get back into so much debt and allowing foreigners to own so much of that debt."

Bove, an avid reader of economic and political treatises, is as pessimistic about the domestic economy as he is about stock market research. "These political historians go back and point to the fact that this is what destroys nations," he says. "We're not reinvesting our money into the United States. We're reinvesting it into China."

His youngest son recently sought Bove's input for a college term paper about the new economy. "As far as the new economy is concerned," Bove told his son, "what you're looking at is 10 years from now, you'll be working for a company headquartered in China and 50% of your income will be used to pay back the deficit which we created this year."

Straight talk

Dick Bove puts in his two cents on testy investor-relations execs, quote-seeking news reporters, and what he doesn't miss about mixing securities research with investment banking.

On his relationship with Fifth Third Bancorp, a Cincinnati financial services company with automatic teller machines in Florida. Bove has rated Fifth Third only "neutral" and says the company needs to buy other banks to keep growing:

"They got so furious at me, over what I was saying, that they called up here and said: 'You're not allowed to follow this company anymore. We're not going to send you any information. You're out. You're finished.'

"I wrote a little note to the CEO of the company, in which I said: 'I realize you've made a mistake because I know you don't want me to call the SEC and tell them what you said. But I am going to make that telephone call unless you get back to me pretty damn quick and tell me this was a mistake.'

"And they got back to me pretty damn quick and told me it was a mistake."

(Two Fifth Third couldn't be contacted for comment before GCBR's deadline.)

On dealing with the news media:

"They're in the quote business. I mean, they may have strong opinions about a given subject. But they can't state their opinion. So they call someone who they know what that guy is going to say. You know, he says what they think he's going to say and then that's how they do their opinion."

On joining stock researchers and investment bankers at the hip:

"I'm not happy because I want to get back to what I used to earn. I'm trying to do it without doing any corporate finance work. That's tough.

"I just don't want to do it because it kills you. You're dealing with these goddamn egomaniac company presidents who believe they all should be worth $100 million. Whatever their stock is selling for, it's too cheap. Who believe that you're their employee, so you don't have the right to express your opinion on anything.

"And, if you dare to say something they don't like, they're right away to the corporate finance department or to the president of the company or the president of the brokerage firm, what-have-you, and the pressure then is intense. So it's not pleasant."

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