Brand-new Bradenton resident and New York Stock Exchange past president William R. Johnston practically grew up on Wall Street. His father was a trader, and Johnston, now 70, recalls buying his first stocks at age 14. The New Jersey native served as a top executive of several trading firms, including as chairman and chief executive officer of Agora Securities, which he founded and merged into LaBranche & Co.
During his long career on Wall Street, Johnston served on several key NYSE committees, including those addressing market performance and quality of markets. He was elected a NYSE director in 1992 and was hired as president and chief operating officer of the exchange in 1996, serving until 2002. “I grew up in an industry where your word was your bond,” Johnston says. “Bad apples were prosecuted and thrown out of the business. We need to get back to that kind of mentality.”
Johnston has taught at the university level and lectures nationally on matters associated with leadership and business.
He often talks about his experiences during what he calls “two of the most compelling days on Wall Street: the stock market crash of Oct. 19, 1987, and Sept. 11, 2001.”
Johnston has been visiting the Sarasota-Bradenton area for the past 30 years and he and his wife, Betsy, recently bought a home in Bradenton.
Most of his time these days is spent on nonprofit work. In this region he’s on the board of trustees of Plymouth Harbor on Sarasota Bay, a not-for-profit older adult community, and on the Friends of DeSoto National Park board. He’s also president of the Omicron Delta Kappa Foundation, a national leadership society.
“At this stage of our lives it is all about giving back,” Johnston says. He won’t serve on any corporate boards. “I made a conscious decision to limit service to 501(c)3s,” he explains.
We asked Johnston about some of his experiences and insights into Wall Street and the current financial crisis.
Q: How did we get into this mess? You and I don’t have enough fingers to point at all the guilty parties, starting with banks, with mortgage brokers, with customers who were maybe lying on their forms to get loans, to regulators, to Congress, if one wants to go that far, for the encouragement of Freddie Mac and Fannie Mae to loan more, to the Fed that took interest rates down too far, too fast. And there is a generation today that believes they have to have the biggest house they’ll ever have. It just doesn’t make sense.
Q: Do you believe some companies really are too big for us to allow them to fail? Or should we let capitalism follow its natural course, let the destruction happen and start a new creation cycle? From Wall Street’s standpoint, letting Lehman Brothers go sent a message. I’m not so sure in the automobile industry that you don’t want some [native] industry. God forbid, we should ever get into a war where we couldn’t produce our own tanks, our own whatever vehicles that are needed to outfit an army.
Q: Are Obama’s market reforms to create a consumer protection agency and to give the Federal Reserve new powers to regulate large firms and markets headed in the right direction? We have to step back and look at the regulation that we have. Probably the classic example in our lifetimes would be Sarbanes-Oxley [federal legislation passed in 2002 to regulate public companies after a number of corporate scandals]. It was the right idea. We needed to do something after Enron, WorldCom, Adelphia, Tyco, the other companies that caused Sarbanes-Oxley to come into existence. Was the legislation right? Yes.
[But] the legislation was written in haste, and it probably did a lot of harm to smaller companies that can’t afford to pay accountants and legal advisers to the degree that Sarbanes-Oxley forces them to do so.
I would hope that with any [market reform] legislation there has got to be some agency from a consumer point of view that says, ‘Hey, you can’t do that,’ just as there is for the energy industry, or the airlines, for example, in terms of safety. Regarding the Obama legislation, I think the jury is still out.
Q: Are there any new mortgage regulations or changes you’d like to see? I would love to see the banking industry come out with a standard, simple mortgage that you and I can understand. Here’s a 30-year mortgage from Citibank, here’s a 30-year mortgage from PNC, here’s a 30-year mortgage from SunTrust in Florida. It’s the same 30-year mortgage—it has no points and no fees, or the fees are comparable, and we could tear and compare and have a mortgage that people could understand.
There are too many bells and whistles, too many fancy things that have been done to obfuscate the fact that people are going to get messed over by little hidden goodies put in there to attract people who have not done their homework.
There were mortgages written that should have never been written. There were houses sold that should have never been sold.
Q. Should there be a fundamental shift in the way corporate boards are structured to eliminate the all-too-cozy relationship among directors and management? [Board governance] will continue to get better as institutions, mutual funds, whatever, put the pressure on companies to do so. Most companies have gotten better, and I believe Sarbanes-Oxley has helped in developing more independent board members so that the good ol’ boy, the “you-pat-my-back, I’ll-pat-your-back” community is diminishing.
Q: Should the compensation system on Wall Street—a base salary coupled with a much larger bonus—be regulated? It seemed to drive a lot of bad decisions. If it’s a profit-driven bonus, meaning that you have earned x number of dollars for your company and are going to get paid some percentage of x, whether it is 5 percent, or 10 percent, then I don’t have any problem with incentive compensation.
Having been paid incentive compensation based on the profitability of our firm in the 34 years I was a trader, I totally understand the concept. We also made our traders leave up to 50 percent of that compensation in the firm, both to build capital and because we knew there would be less profitable years to come. Unfortunately, Wall Street seems to have forgotten that there are bad years, and traders cannot expect to be rewarded for losing money any more than CEOs should be compensated for poor performance.
[We should give] all the transparency [possible] in company reporting and give the shareholders the ability to know what the CEO, CFO, and top three, four, or five officers are making.
Q: Can the exchanges’ oversight and technology keep up with the Ponzi schemers, or is it up to the due diligence of the individual investor to catch the bad guys? The reason that the Madoffs and the Nadels get caught is because you go into a bear market and people want to draw down their share of the profits that the Ponzier has made for them, and suddenly there is no opportunity to pay them off.
Other types of schemers, the insider traders and others, get caught in time, too. Primarily because either A, somebody whistle blows, or B, other agencies such as the IRS figure out that they are living beyond their means and are not reporting income. Ultimately the system works, and they are caught. The exchange’s regulations and the SEC’s [oversight] do a pretty good job.
Q: Have you seen a shift in the role of investment analysts? Do the TV stock market gurus serve the greater good? Sarbanes-Oxley has addressed that as well. As an investment analyst, you have got to proclaim your independence from either your analytical report, or claim that you own stock, or that your firm does investment banking for the company. That’s all very good. I don’t watch much financial television. It can relay [market] news quickly, which is good. But I am not sure I could stomach some of these guys every day.
Q: Has the equities market stabilized? While we may get significant corrections, I believe we have seen the lows for this cycle.
Q: Can you forecast a rebound of the Sarasota-Manatee regional economy? In light of some continuing bad loans that banks face, we are not yet out of the woods regarding this economy. Until both the housing market and job market in our area get better, we will continue to feel pain.
Q: What investment advice are you giving your children? To a number of young people, including our children, I am suggesting buying a portfolio of classic great names: leaders in good industries like Merck and Pfizer, Wal-Mart, DuPont, 3M, Coca-Cola, Pepsi-Cola, Conoco and Exxon. I am a strong believer in 529 plans and encourage your readers of my age to look at them for their grandkids’ educations. ■