In reading the last few days’ business press, I’ve been struck by the volume of what I’ll call negative superlatives: “toughest environment in a generation;” “can’t use the tools from the last recession;” “seismic decline;” “worst I’ve seen;” “most difficult our company has faced;” and even the un-trumpable, “worst ever.”
The people behind these words probably are not crying wolf. But even if history shows that they are overreacting somewhat, this remains incontrovertible: America’s financial institutions have never been reshaped as radically and quickly as they have been in 2008. And if the future holds a series of tectonic movements that are more violent than those of late, one wonders if the “system,” as we’ve taken to calling it–whatever “it”
Consistent with a brief post I dashed off as Lehman was filing for bankruptcy and our firm–to our great fortune–was closing a new fund, I’ve been thinking a lot about the leaders of the institutions which have been forced to morph most radically. And I’ve come to a conclusion which although imperfect and unscientific is a conclusion nonetheless: the more inextricably entangled were the identities of the firm and its leader, the worse was the outcome for the shareholders.
The poster children for this argument, of course, are Dick Fuld and John Thain. Although the venerable Lehman Brothers was founded long before Fuld arrived on the planet, few Wall Street CEOs had been in the chair longer or more fully identified with the institution he led. As a result, it seems, Fuld’s objectivity was so compromised that he was unable to seize on numerous, ever-more-dilutive opportunities to save Lehman. Even though he lost something like $600mm of paper net worth in the process, it’s still no wonder that a Lehman employee took a swing at him in the company gym.
At the other guard rail is John Thain, late of the NYSE. Thain came to Merrill as the ultimate hired gun. And given the arc of his career, he could be forgiven if his super-hero underwear bore the Goldman logo rather than the Merrill bull. Objectivity fully in tact, Thain concluded that “we’re next,” and pulled off what will likely be shrewdest deal of the super-compressed era for Merrill shareholders. As today’s WSJ reminds us, Thain looks like an absolute hero today. B of A paid 1.8x book for Merrill; Goldman and Morgan currently trade for 0.8x and 0.4x respectively, only a couple of months later.
The other U.S. firms which have been most affected by the Wall Street earthquake can be placed on a spectrum from abject failure (Lehman as anchor) to relative triumph (Merrill). And although the correlation is imperfect, their leaders can likewise be placed on a spectrum of die-with-their-boots-on entrepreneurs (Fuld) to coolly objective managers. It’s interesting how well the two match up.
(I’m leaving Fannie and Freddie out of this picture on the theory that they were government-sponsored casinos-cum-brothels rather than real businesses to begin with).
Closest to Lehman’s fate was Countrywide, the king of the subprime mortgage. Perpetually tanned founder and CEO Angelo Mozillo founded the company, and continued to dissemble, make sweetheart loans to cronies, and generally whistle past the graveyard until he was forced to sell his baby to B of A for pennies on the dollar, many of those dollars having been supplied by David Bonderman’s TPG only a few months prior. Unlike B of A’s purchase of Merrill, this one still looks like a straight transfer of wealth from the shareholders of Countrywide to those of B of A.
Next up is Bear Stearns. Jimmy Cayne was even more identified with his firm than was Fuld at Lehman; by the time the board finally ousted him in January, he had already been pilloried for playing bridge while the subprime dam began to burst in the form of the failure of two Bear hedge funds. Alan Schwartz, his successor, might have proven a Thain-like figure had the board given him more runway by moving on Cayne a year earlier. But given the flaming sack of poo he was handed, we’ll never know.
In the middle of the spectrum–in terms of both leadership and outcome–lie Morgan Stanley and Goldman Sachs. Even though both institutions were forced to trade their universe-mastering status as investment bankers for the relatively proletarian lot of commercial banks, Morgan emerged far more vulnerable than –and half as valuable relative to book value as–its rival Goldman. And again, the pattern fits, at least of a fashion. Although John Mack fits far more the hired gun profile than Richard Fuld, his tenure at Morgan Stanley has resembled nothing so much as a Harvard Business School case, albeit one taught by Machiavelli. Most of the drama at Morgan leading up to the crisis–and there has been plenty–has been about Mack’s survival. The same was true only more so for his successor, Philip Purcell. Over at 85 Broad, Goldman has been good for considerably less drama. Although Lloyd Blankfein doubtless bleeds Goldman–uh, green, I guess–he is a professional manager who was promoted by his partners to lead the firm. There were a dozen or so before him, and presumably there will be dozens after.
A final case is Citi, which is a bit more complicated and ambiguous but I think supports my thesis more than it controverts it. Sandy Weill was of course synonomous with building the insitution through countless acquisitions over better than three decades. (I can highly recommend Monica Langley’s biography of Weill, Tearing Down the Walls). Weill almost certainly remained on the Citi throne for too long, and just as certainly attempted to extend his reign by running off now JP Morgan CEO Jamie Dimon and anointing his acolyte and lawyer, Chuck Prince. Prince was a miserable failure, and Citi has not fared well; one is tempted to analogize Vikrim Pandit’s situation to that of Alan Schwartz at Bear.
What does all of this mean? For one thing, it really shines the light on something that we in the venture business see on a smaller stage all the time. Most entrepreneurs are maximizers, not optimizers. They manage well when things are going well; battening down the hatches does not suit them temperamentally. Which brings us to a second conclusion. Most successful CEOs build boards which are “their” boards. And so in tough times, boards are always, always, always too slow to challenge the guy who brought them aboard to begin with.
I don’t have any prescriptions. Only an observation that when things get rough, shareholders do well to ask after the objectivity of the board and CEO of their enterprise. And although I can’t prove it, I would wager that this phenomenon is particularly acute in big-time financial services, where the egos don’t come any grander.