Net worth of U.S. brokerages down $884 million at end of '02

In its review of the financial statements of 354 brokerage firms with a Dec. 31 fiscal year-end, Weiss Ratings found that the net worth of the nation's brokerage firms declined 1.9 percent, or $884 million, from Dec. 31, 2001 to Dec. 31, 2002.

According to Weiss, the net worth of brokerages in the United States was $46.3 billion at Dec. 31, 2002, and it fell to $45.4 billion at Dec. 31, 2002.

While reviewing the firms' financial statements, Weiss also found that despite the marked decrease in net worth, or shareholders' equity, the industry's net capital, or liquid net worth, increased $1.1 billion, or 4.3 percent. Net capital was up from the $25.7 billion reported at Dec. 31, 2001, to $26.8 billion at Dec. 31, 2002.

The increased net capital was driven in part by an increase in subordinated liabilities, which rose 4.4 percent from $22.6 billion to $23.6 billion during the same period.

Subordinated liabilities are liabilities in which the lender has agreed to subordinate its claim for repayment to the claims of all other creditors. Subordinated liabilities must meet several conditions to be included in net capital.

"Essentially, firms replaced solid equity, earned from operating profits, with debt and then shifted to more liquid assets, which has the effect of improving net capital," said Melissa Gannon, vice president of Weiss Ratings Inc. "The bear market has taken its toll on operating profits, which forces firms to find other ways to meet their regulatory net capital requirements."

The Securities and Exchange Commission's Uniform Net Capital Rule requires brokerage firms to maintain certain levels of net capital, depending on the type of business in which they engage and their level of unsecured debt. The rule is designed to measure the general financial integrity and liquidity of a broker and the minimum net capital deemed necessary to meet a broker's continuing commitment to its customers. Failure to maintain the required net capital may subject a firm to suspension or expulsion by the New York Stock Exchange, the SEC and other regulatory bodies.

Weiss Ratings, which receives no compensation from the companies it rates, issues safety ratings on more than 15,000 financial institutions, including brokerage firms, banks, insurers and HMOs. The company also rates the risk-adjusted performance of more than 12,000 mutual funds and more than 8,000 stocks.