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Executive Times |
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Volume
10, Issue 10 |
October 2008 |
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Note
re: links---certain hyperlinks assume that you are registered as a subscriber
to the site. If you are not a subscriber to certain sites, the links will
fail. If you register, the links should work. Also, certain hyperlinks expire
and may not be available when you try to go to the site. Triage
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 books@hopkinsandcompany.com.
You can also check out all the books we’ve ever listed at http://www.hopkinsandcompany.com/All
Books.html. Mommy! 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? Gracious 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? Catbird 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? Blackwater 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? Follow-up Here’s
an update on stories covered in prior issues of Executive
Times: Ø
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. Ø 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) Legacy
Handwork 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: (Note: readers of the web version of Executive Times can click on the book covers to
order copies directly from amazon.com.
When you order through these links, Hopkins & Company receives a
small payment from amazon.com. Click
on the title to read the review or visit our 2008 bookshelf at http://www.hopkinsandcompany.com/2008books.html).
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Hopkins & Company, call Steve Hopkins at 708-466-4650 or visit www.hopkinsandcompany.com. |
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