Volume 10, Issue 10
2008 Hopkins and Company, LLC
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Imagine the shock of a financial executive who took a two-week wilderness vacation in unplugged bliss during September upon his or her return. Still out of Blackberry range, the executive decides to phone the office after thanking the guide for an amazing experience and finding electricity and phone service. The scene of the executive staring at the phone could come from an old episode of The Twilight Zone. “What’s going on?” “Not much. Fannie Mae and Freddie Mac went into federal conservatorship with a $200 billion bailout. AIG got $85 billion in federal backing to remain afloat, but Lehman went bankrupt. Lucky for Merrill Lynch that Bank of America was willing to buy them. Goldman and Morgan Stanley are now bank holding companies. Hank Paulson is trying to get Congress to give Treasury the authority to hold up to $700 billion in illiquid securities. Oh, and Wamu was seized in the largest bank failure in history. Other than that, things have been pretty quiet while you were away.” This is not what the world was like before vacation. As a monthly periodical Executive Times usually has the luxury of writing about individuals and companies for whom issues have been pretty much resolved. This month, whatever we write could well be reversed or supplanted within minutes of publication. The corporate patients in intensive care could recover or worsen. The walking wounded may die. Given a higher degree of uncertainty than usual, this issue focuses on a few of the executives in the middle of some of the big September transactions. As you think about what they did and what they chose not to do, think about your own situation, and your ability to engage in prompt triage. If faced with similar challenges as these executives, what would you do? Is there an October surprise that will lead you and your organization into challenges and opportunities that require prompt decisions?
Fifteen new books are rated in this issue, beginning on page 5. Two books are highly recommended with four-star ratings; ten are recommended with three-star reviews; and three books are rated with two-star recommendations. Visit our 2008 bookshelf and see the rating table explained at http://www.hopkinsandcompany.com/2008books.html as well as explore links to all 400 books read or those being considered this year, including 50 that were added to the list in September. If there’s something missing from the bookshelf that you think we should be considering or if there’s a book lingering on the Shelf of Possibility that you think we should read and review sooner rather than later, let us know by sending a message to firstname.lastname@example.org. You can also check out all the books we’ve ever listed at http://www.hopkinsandcompany.com/All Books.html.
Both insiders and outsiders of Merrill Lynch referred to the firm as “Mother Merrill” as a way to describe the corporate culture. Depending on the context, the reference was either pejorative or respectful. After watching Lehman Brothers and its suitors fail to get federal assistance to facilitate a takeover, Merrill CEO John Thain made a phone call on Saturday morning, September 13 to Bank of America CEO Ken Lewis asking if B of A would be interested in discussing strategic opportunities. Lewis flew from Charlotte to New York and the two started meeting two and a half hours after the phone call. Within 48 hours, a transaction was announced in which B of A would buy Merrill for stock, subject to shareholder approval of both companies. At a press conference announcing the deal on September 15, (http://www.americanbanker.com/article.html?id=200809152ZF9LJ4A) Lewis commented, “It didn't take but about two seconds to see the strategic implications, the positive implications.” It took about the same amount of time to reverse his own opinion about investment banking. In the 3Q07 investor call, following a huge drop in investment banking earning, Lewis said, “I never say never, but I’ve had all the fun I can stand in investment banking at the moment.” We read in The Charlotte Observer (9/16) (http://www.charlotteobserver.com/business/story/195507.html) “Lewis has long expressed misgivings about buying an investment bank because of the risk and the potential for culture clashes. He admitted that the bank's progress in investment banking has been ‘frustrating’ over the years, but noted Merrill Lynch gives the bank immediate size and scale, along with bringing its expertise in wealth management. ‘I like it again,’ he said of investment banking.” While no longer independent, one phase of uncertainty ended for Merrill Lynch with this deal. Next to come are expense cuts, rebuilding capital and forging a united corporate culture, which may or may not be like what those at Mother Merrill have enjoyed in times past. Lewis is about four years away from mandatory retirement, and Thain’s role in the combined company, if any, remains unclear. At age 53, Thain might be a worthy successor to the company that Lewis has built. That assumes that shareholders approve the deal. Stay tuned to watch the fun unfold, and see who’s thought of as a caring mother and who’s called a mother something.
Could you be as nimble as Lewis in putting together this transaction over a weekend? Could you be as realistic as Thain without ensuring a position for yourself in the combined organization?
One of the financial companies least likely to need federal assistance received just that in September when American International Group (AIG) agreed to an $85 billion revolving credit facility with the Federal Reserve (http://ir.aigcorporate.com/phoenix.zhtml?c=76115&p=irol-newsArticle&ID=1200447&highlight=). According to new CEO Edward M. Liddy, “AIG made an exhaustive effort to address its liquidity needs through private sector financing, but was unable to do so in the current environment. This facility was the company's best alternative. We are pleased to have finalized the terms of the facility, and are already developing a plan to sell assets, repay the facility and emerge as a smaller but profitable company. Importantly, AIG's insurance subsidiaries remain strong, liquid and well-capitalized.” The person who led those exhaustive efforts was the CEO appointed June 15, Robert B. Willumstad. In what might be the start of a new trend, Willumstad sent an e-mail to Liddy saying that despite the terms of his employment agreement, he would forgo $22 million in severance payments since he was not able to execute the restructuring plan he developed, saying in part, “I prefer not to receive severance while shareholders and employees have lost considerable value in their AIG shares.” There was little applause in the business press with this gracious act; some noted that it was done to avoid criticism. See the Follow-up section of this issue of Executive Times for the impact on one big AIG shareholder.
When would you decide to abandon the terms of an agreement? Would you have done what Willumstad did?
In Warren Buffett’s 2002 letter to Berkshire Hathaway shareholders, he said, “We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” (http://www.berkshirehathaway.com/letters/2002pdf.pdf). He remained alert, accumulated and maintained about $40 billion in cash, and waited patiently for the right opportunities. When Goldman Sachs needed equity, they called Buffett. Here’s part of that story as described in a great story in the September 25 issue of The Wall Street Journal, (http://online.wsj.com/article/SB122226055484170915.html) “On Tuesday, Mr. Buffett says, he was sitting with his feet on his desk in Omaha, drinking a Cherry Coke and munching on mixed nuts, when he got an unusually candid call from a Goldman Sachs Group Inc. investment banker. Tell us what kind of investment you'd consider making in Goldman, the banker urged him, and the firm would try to hammer out a deal. That midday call from Goldman's Byron Trott, who had done deals with Mr. Buffett for years, touched off a rapid chain of events. … Mr. Buffett is famous for making quick investment decisions based on his gut. For the Goldman deal, he says, ‘I didn't see a book. I just made a judgment.’ The quality of Goldman's management team and its franchise, he says, sealed the deal for him. He didn't insist on a complicated term sheet, he says. Instead, he spent 15 minutes with Mr. Viniar, Goldman's chief financial officer, outlining points of the deal. ‘They asked me about this or that,’ he says. ‘It sounded fair.’ By the time markets closed in New York at 4 p.m., Mr. Trott was sealing the deal with a final call to Mr. Buffett. … The question now: Will Mr. Buffett -- whose firm has invested a total of about $24 billion in a number of ventures in recent months -- plunk down more money on Wall Street? He says he remains interested in some of AIG's businesses ‘if they are available.’ He adds: ‘I still have some money left.’” Five years of waiting in the catbird seat for the right call seems to have paid off in the ability to buy into a great business at great terms.
How much patience do you have? How long are you willing to maintain a contrarian position when your competitors are making money following a different approach? How prepared is your gut to act when called on with a once-in-a-lifetime opportunity?
Another key player profiting from the current financial crisis is Bill Gross, chief investment officer of Pacific Investment Management Company. Thanks to an overweighting in Fannie Mae and Freddie Mac securities, the world’s largest bond fund, Pimco’s Total Return Fund, had its greatest one day relative performance gain at 1.32% after the federal bailout of those companies. (http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSNYG00124220080909) Next up is a chance to manage a chunk of the $700 billion or so in assets that Treasury may buy from banks. Following an op-ed he wrote for The Washington Post (9/24) (http://www.washingtonpost.com/wp-dyn/content/article/2008/09/23/AR2008092302322.html) that describes how the bailout deal is good for Main Street, Gross told CNBC’s Erin Burnett that Pimco would do the work for free, if that’s what other investment managers would do as well. (http://video.on.nytimes.com/?fr_story=172c7565aa3d5c62e0d5ad9c14902577d5235b5c). Wow! Gross is willing to do for toxic mortgage assets what Blackwater has been doing in Iraq, but for free. Gross also said the banks need about $500 billion more. This is not free.
Can you exploit certain opportunities that strengthen your organization and weaken competitors? When can free pay off for you and your company?
Here’s an update on stories covered in prior issues of Executive Times:
Ř The last time Executive Times called attention to Hank Greenberg was in the June 2008 issue when we noted his May 11 letter to the board requesting a postponement of the annual meeting to allow more time to figure out how to move the company forward. The board refused. Until the end of September, the former AIG CEO continued to own personally 12.9 million shares of the company. Starr International, where he is CEO, owned 243 million shares. Over the last year, the stock price high was $70.13, the low $1.25. It’s currently trading around $3.00. Do the math. After weeks of trying to raise private capital and pursue alternatives, and after AIG signed for the revolving credit facility with the fed, Greenberg filed notice that he may materially decrease his holdings for liquidity. Nobody’s passing the hat for Hank, but the proceeds he gets from the sale of AIG stock will be a whole lot less that it could have been.
Ř The last time Executive Times mentioned JPMorgan Chase
CEO Jamie Dimon was in the November
2007 issue when we noted
that doing well was the best revenge, especially in comparing his results at
Morgan as compared to the house that Sandy Weill, the boss who fired Dimon,
built at Citigroup. At the end of September, Chase agreed to
pay the FDIC $1.9 billion for most
of Wamu, giving the company 2700
new branches, $300 billion additional assets, and some opportunities to cut
costs. Dimon said of the Wamu
acquisition, “This deal makes excellent strategic sense for our
company and our shareholders. Our
people have worked hard to build a strong franchise and balance sheet -
making this compelling transaction possible. As we have said in the past,
increasing our regional banking presence not only strengthens our Retail
business, but also benefits other business lines across our firm, including
our commercial banking, business banking, credit card, and asset management
groups. JPMorgan Chase is strongly committed to both a strong banking system
and our responsibility as a good corporate citizen. We are active in the
states and local communities where we do business. We look forward to
welcoming Washington Mutual's employees to JPMorgan Chase and working with
them as we build a great company together.” (http://investor.shareholder.com/jpmorganchase/press/releasedetail.cfm?ReleaseID=336893)
This has been an age of derivatives and work done electronically. It might be time to recognize the pleasure, value and importance that can come from work done by hand. One executive who learned that lesson first hand was Henry Z. Steinway, the last member of that family to build the pianos that carry the family name. Steinway died at age 93 in September, and his New York Times obituary noted, (http://www.nytimes.com/2008/09/19/arts/music/19steinway.html) “He joined the company after graduating from Harvard in 1937 and began his career by building pianos, just as his father and uncles had. ‘I learned a respect for work that is actually done,’ Mr. Steinway said years later. He also discovered that making instruments that have thousands of tiny parts under the lid is not easy. He said it took him a day and a half to do what the workers at the factory did in four hours. … He became the factory manager after the war and president of the company in 1955, when his father made a surprise announcement that he was stepping down, immediately.” Steinway sold the company in 1972 when no one in the next generation was interested in carrying on the legacy. Although he retired at age 65, until weeks before his death, Henry went to Steinway Hall almost every day, and would go to the factory to sign the cast iron plates of newly finished pianos. Perhaps some recently unemployed New Yorkers will find joy in “work that is actually done.”
Latest Books Read and Reviewed:
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