JIM CRAMER: … once more into the breach, dear friends, once more. That was my Shakespearean response to the selloff in Charles Schwab, the big retail brokerage firm. This is the stock I’ve been recommending ever since it melted down in the spring of last year during the mini banking crisis, even though Schwab is not a bank. Ever since then, the stock steadily recovered. But there have been repeated moments where it gets crushed for bad reasons, and you have to go into Henry V mode, and buy this thing aggressively. This week, it happened again. Schwab reported Tuesday morning, and in response, the stock has lost 17% of its value, so 1-7 over the past three sessions, even though the sales earnings came in better than expected. This time, the story is more complicated, with some nuanced questions about customer cash balance trends and how Schwab treats cash for customers that it acts as an advisor for. That’s why I want to go straight to the source with Walt Bettinger… he is the Co-Chairman and CEO of Charles Schwab Corp… to get a better read on what’s going on here. Mr. Bettinger, welcome back to Mad Money.
WALT BETTINGER: Jim, thanks for having me on today. I really appreciate it.
JIM: Of course. Now, Walt, first of all, we want to dispel the really bad thing. There were a lot of people who told me, ‘Oh my God, it’s a mini banking crisis again with Schwab.’ They’re worried about deposit balances. They’re fleeing. Just put something in context about last year versus this year, please.
WALT: Yeah, the situation couldn’t be any different. The circumstance with our stock decline in the last few days has nothing to do whatsoever with the regional banking-related issues of a year-plus ago. We have put that in the rear-view mirror. And I shake my head. I have to admit, I’ve shaken my head and done some double-takes multiple times the last few days as I’ve read some of the articles and seen some of the headlines. Jim.
JIM: Well, I don’t blame you. There’s one that came out this afternoon at 2:53 PM in Barron’s. You know, I’ve read Barron’s since I was a little boy. ‘Schwab shortchanged clients’ cash for years. Now they’re paying for it.’ I have to give you a chance to be able to refute that because that’s pretty incendiary.
WALT: Yes, it is. I think where they’re coming from is when Schwab serves as an investment advisor or fiduciary to our clients, and so we are setting the asset allocation for those clients, we determine how much money goes into cash. When we do that, we ensure that the clients’ cash across all of our advisory solutions at Schwab goes into a high-yielding money market fund. So I think there’s confusion about the difference between when we serve our clients as a fiduciary, in other words, as an investment advisor, and when we’re just self-directed, in which it’s in the hands of the client, and they go ahead and do whatever they want to do with the cash among all the various choices we have—money market funds, CDs, US treasuries, bank. It’s completely up to the client when they’re self-directed.
JIM: Now, a lot of this comes under the rubric of cash sorting. I care about when this rubric doesn’t need to be discussed anymore. I know I felt that the previous quarter was the last we would have to worry about cash sorting, which in a nutshell, is people taking their cash out of Schwab to try to get a better return. Are we done with this topic? Is it small enough, di minimis enough that it won’t come out next time? Because if that’s the case, Walt, then this stock has been overly punished.
WALT: Well, I certainly think it’s the case. We’re not really seeing clients realigning money out of our bank, their liquid transactional cash, anymore in any volume. I think in the second quarter, people may have been disappointed that we were a couple of billion dollars less than they anticipated. But you’re talking about a $9.4 trillion base, a record base in assets. And June was a wonderful month to buy into the market. A lot of our clients did. So their cash went down a little bit more than anticipated because they bought stocks. Three billion divided by 9.4 trillion is a really, really small fraction, Jim.
JIM: Well, then maybe the problem is the earnings power. These analysts don’t seem to know, Walt, how to model your business. So I can’t ask you to model it on our show, but for instance, in the Callen downgrade, which was a significant downgrade, they kind of said, ‘Look, we don’t know what the hell they’re going to earn.’ And I think that is probably also doing you a disservice.
WALT: Well, it is, and I think it’s linked to some erroneous commentary that got out there around us shrinking our bank, and some even said shrinking the company. Now, when you’re adding a million new clients a quarter and bringing in $25- to $30 billion a month, that sounds like growth to me, not shrinking. But what I think occurred is we talked about a scenario where we might look at certain times in the interest rate cycle, because we get more deposits to our bank than we possibly have in loans, we might look at shipping some of those deposits off to a third-party bank if it generated more earnings per share for us. In other words, when a dollar comes into us at the bank, we have to put capital behind that. There’s a lot of banks who would love us to pass a few of those deposits onto them in return for a very small fee, and then we don’t have to put any capital up. It’s actually earnings accretive. And that’s what we talked about in our Analyst Day on Tuesday. I think that got misinterpreted to the shrinking of the bank, or de-banking, and it’s just not the case at all.
JIM: I want you to do that. I want you to make that money. Now, I do want to ask you if all these come under the category of, say… I want to use the term ‘misinformation.’ If they come under misinformation, then this is a great opportunity to buy the stock. So why are you or not you taking advantage of the decline and buying stock yourself?
WALT: Well, I did, Yesterday, as the stock fell, I jumped in and bought another 25,000 shares, and I’ve got my eye very closely on the stock to see what it’s doing now to make a determine whether to buy more. But I did buy a bunch yesterday. Again, I can only shake my head at our rate of growth and some of the things I’ve read. It doesn’t sound to me like they’re talking about the company that I’m so familiar with.
JIM: Well, people sell stock for many different reasons. They only buy stock for one, which is to make money. You’re no different. I know you bought during the mini bank crisis, it was… let’s just say, it ended up making you a lot of money. You can’t flip, I know that, which makes it even more of an important reason to note that you bought, because you can’t flip, and you’re in it for the long term. I think that these stories are overdone, but I also know this market has a mind of its own right now, Walt, and it doesn’t want to go up. So let’s see what happens.
But thank you for coming in and explaining what’s really going on, and let people make their decision. Fair enough?
WALT: Fair enough, Jim. We’re just going to keep focusing on serving our clients. That’s how you grow. That’s what we’ve done for 50 years. That’s not going to change. The stock will go up. The stock will go down. Eventually, in the long run, the stock will reflect the way we deliver for our stockholders. That’s all we can ask for.
JIM: No, that is all you can ask for then. Ad that’s the way the stock market works. I’m want to thank Walt Bettinger. He is the Co-Chairman and CEO of the Charles Schwab Corporation. He came on to explain what are really some very complicated issues, but certainly not nefarious ones. Walt. They are not nefarious. Thank you so much.
