‘The tragedy of life is not that man Loses but that he almost Wins’
It is an enduring trap for all those who labor in important, high-profile jobs to have their words recorded and thoughts chronicled. The fate of Richard Nixon, as you may recall, was sealed by the sound of his voice on the infamous White House tapes. But in most instances, political and business leaders are not hung by their own words as much as their reputations retroactively are wounded by them. Through their utterances they can later be seen in dramatically different light. Such is the case with G. Kennedy Thompson, the small-town son of a North Carolina mill manager who ascended to the top ranks of America’s financial industry — and thus the world’s top ranks, considering that all currencies lead to Wall Street — only to fall to earth with the spectacular collapse of his bank.
One year ago, Wachovia Corp. stood as the nation’s fourth-largest bank holding company, poised to grow even larger after an ambitious expansion into California with its purchase of Golden West Financial Corp., a mom-and-pop thrift grown big and prosperous. As 2008 closed, Wachovia existed essentially as a ward of the state, propped up by regulators in the interregnum between life as a sovereign entity and absorption into Wells Fargo & Co. — the bank that would become, when the takeover of its crippled rival was completed, the national powerhouse that Thompson once envisioned himself overseeing. To read his words now, knowing what we do about the fate of his company, is to be captivated by the classical themes and flaws found within them, making Thompson’s utterances redolent of Greek literature or Shakespearean tragedy. Irony, blindness, hubris and whiffs of conspiracy abound. Let us consider them, in order.
Q: What is your all-time favorite book? A: The Last Lion: Winston Spencer Churchill, Visions of Glory by William Manchester. Q: Is there a particular genre that appeals to you? A: I read a wide range of books and publications, but I especially enjoy biographies and historical novels. I love lessons learned from historical figures.
Who can ponder those answers and not be astonished by the irony within them? Only those people who don’t know, or have forgotten, Wachovia’s history — and by that we actually mean the history of First Union Corp., the bank that swallowed Wachovia but then took on its name. In the 1990s, First Union and its hometown competitor, NationsBank (formerly NCNB and latterly Bank of America), launched a frenzied race for local bragging rights to bigness. Hugh McColl headed NationsBank, while Ed Crutchfield headed First Union — gunslingers both. It was high noon at Trade and Tryon, the fabled intersection in downtown Charlotte that had become the epicenter of Wall Street South. In the end, McColl won, mostly because his high-dollar acquisitions proved less troublesome than Crutchfield’s. When First Union acquired Philadelphia-based CoreStates Financial Corp. in 1998 for nearly $20 billion — then the largest bank merger in U.S. history, proving Crutchfield wasn’t kidding when he said his key to negotiation was to keep “stacking billion-dollar bills on the table” — the bank’s troubles began in earnest. It was too much money, too many operations to integrate properly, too much of a drain on First Union’s resources and eventually too big a drag on the company’s stock price.
Crutchfield stepped down as CEO in 2000, citing health problems, and Thompson ascended to the corner office. From that perch, the lover of history and learner of lessons eventually would stack the billion-dollar bills even higher on the table than did his predecessor, with an even more dramatically unhappy result. Instead of history, perhaps Thompson should have focused on philosophy, most pointedly that of George Santayana, who famously observed, “Those who cannot remember the past are condemned to repeat it.”
Q: Some people might say, “Look, they acquired Golden West at the peak of the mortgage market. In retrospect, maybe it wasn’t the right time for that deal. And now they’re acquiring A.G. Edwards at what could be … .” A: Yeah. Q: “ … the peak of the securities market.” A: Yeah, that’s the criticism. My answer to that would be the mortgage market in the United States is going to be strong for as far out as I can see. Our population today is 300 million people. Thirty years from now, the population’s going to be 400 million people. That makes me feel good about the mortgage market. Also, Golden West is a pristine lender. Our nonperforming assets at Golden West are less than 80 basis points. It’s timing. We’ve got a great company there.
All hindsight is 20/20, of course, so it’s easy these days to see that the mortgage market already was a disaster in the making when Thompson uttered those memorable words. But where everyone else has clear hindsight, CEOs are paid princely sums to have clear foresight. Housing is a commodity. Mortgages, when bundled together and sold as collateralized debt obligations, are a security. As even the most obtuse investor knows, markets for both are subject to expansion and contraction. Thompson need not have looked back any further than 1990-91, when the previous housing bubble popped and eviscerated the savings-and-loan industry, to be reminded of this. (There’s that lessons-learned-from-history thing again.) Even so, Thompson didn’t have to look backward to understand that he had steered Wachovia into treacherous water. He and other financial leaders should have been tipped off to an inevitable reversal in the housing market by the behavior of ordinary people, who treated their homes as investment tools rather than places to live. When everyone piles into a market with the same get-rich fervor an Amway distributor brings to cleaning products, the smart financier wonders who’s buying if everybody’s selling.
Still, many smart, capable executives missed those signals — or ignored them because no one ever wants to get off a gravy train while it’s still rolling. But few of them had made a $24 billion bet on the housing market, as had Thompson. And it was a bet made against the advice of analysts (one of whom pleaded, “Say it isn’t so”) and to the dismay of investors, whose selling of Wachovia stock caused a sharp dip when the purchase of Golden West was announced. The bank’s share price never recovered and, over the next two years, only spiraled downward.
“We both have what each other needs,” Wachovia CEO Ken Thompson said in an interview. Golden West’s major product is adjustable-rate mortgages. “They need all kinds of [checking accounts], mutual funds, investments and those kinds of things,” Thompson said. “We are fully armed with those products. … This deal is not predicated on cutting costs. It’s predicated on significant revenue growth. We think by 2009 we can be producing $230 million [more] in pretax profit just from revenue synergies.”
Any student of history knows that decisive engagements — when a leader’s reputation is made or destroyed — get boiled down to a shorthand reference. Waterloo. D-Day. Little Big Horn. When the history of (or obituary for) Wachovia is written, that reference will surely be Golden West. In 1963, when a husband-and-wife team bought it for $3.8 million, Golden West was a two-branch savings and loan association based in Oakland. Under the couple’s stewardship, it grew, survived the S&L meltdown of the late ’80s and early ’90s and by 2006, when Wachovia came courting, had 285 branches and a portfolio full of an innovative adjustable-rate mortgage instrument dubbed “Pick-a-Pay.” But virtually at the moment when Golden West’s owners and Wachovia executives shook hands to conclude the biggest deal of Thompson’s tenure, the California housing market started to slump. Wachovia got the ready-made footprint in the West that it wanted. It also got what proved to be a toxic mess of loans.
Let’s pause here for an important bit of context: Since 2001, Wachovia had been a bank with two distinct cultures residing within it. One was the careful, conservative, slightly plodding style that had made the original Wachovia a solid if unexciting presence in the banking world. The other was the deal-making, gambling culture that had ruled at First Union and became the dominant style when the two banks combined under Wachovia’s name. (In baseball terms, it might be said that one bunch was happy to work the count in hopes of a walk, while the other bunch was prone to swing for the fences.) Thompson had come up through the fence-swinging First Union culture and seems to have ascended to the CEO’s office with two things to prove to the world. One was that he could make a big acquisition work — something his predecessor Crutchfield had found difficult to do with CoreStates. The second was that investors — whose chronic doubts about Wachovia’s profitability had kept the stock price mired in a range lower than Thompson felt it deserved — were wrong about his bank and its performance. “Ken got seduced by short-term profits,” says Tony Plath, associate professor of finance at UNC Charlotte. “He felt like they were undervalued by the market and set out to prove it.” The Golden West deal — which Thompson described as “a grand slam home run for us” — would be the fertile field from which profits and respect would flower.
Plath doesn’t believe the purchase of Golden West was, in and of itself, a mistake. “They overpaid, but Ken could have been a hero for establishing the beachhead.” The problem was that Wachovia didn’t immediately move to securitize the adjustable-rate mortgages and sell them to investors. The bank “kept that junk on the balance sheet,” Plath says. And, of course, the day quickly arrived when there was virtually no market for mortgage-backed securities, forcing Wachovia to keep the loans — and eventually write off billions of dollars’ worth. It wasn’t until April, when the light at the end of the tunnel was seen by even the most willfully blind to be an oncoming locomotive, that Thompson acknowledged the obvious, even grudgingly. At a contentious annual meeting, he conceded, “Clearly, Golden West was an ill-timed acquisition.” Five weeks later, he was forced to retire. He was 57.
“I can promise you, at Wachovia to get ahead, a great leader must put the team over himself or herself.”
“I stand here in front of you in the midst of difficult times. I’m not here to sugarcoat things. I’m not here to make excuses, and I’m not here to tell you we were a victim of circumstance.”
“[Wachovia Chairman Lanty] Smith gave Mr. Thompson the bad news on Thursday in Mr. Thompson’s 40th-floor office in Charlotte. Mr. Smith had personally persuaded the other board members to hasten Mr. Thompson’s exit, according to people briefed on the situation. Mr. Thompson was said to be stunned.”
Assuming the Times had it right, his reaction is all the more astonishing because it came just weeks after a shareholder had demanded his resignation at the annual meeting. Could Thompson truly have been surprised by his ouster? Perhaps he didn’t understand that putting the team first might mean taking a bullet for it. (Thompson declined to discuss the events detailed here.) An even more dramatic end awaited the institution where he had spent his entire career. No sooner had Thompson’s successor settled into the CEO’s chair than the global credit crisis hit, toppling financial institutions like so many dominoes. Almost literally the last to fall before the federal government stirred itself into action and created the Troubled Asset Relief Program was Wachovia — a bit of timing that only the most accomplished tragedian could have crafted. After Wachovia fell, the feds were throwing money at banks with the vigor of a newly paid ranch hand in town on a Saturday night. “Wachovia didn’t have to go down,” a former top executive mutters darkly, a sentiment widely shared both within and beyond the bank.
The result was to turn Wachovia into a place with all the atmosphere of the Danish castle Elsinore, whose corridors Hamlet wandered sensing conspiracy and dirty deeds everywhere. Where Thompson’s bewilderment about his fate is puzzling, that within Wachovia’s ranks over the forced sale of their bank to a competitor is understandable. After all, the loans inherited from Golden West were troubling but not fatal one day. The next day, a new value is assigned to that portfolio — right after similar loans held by Washington Mutual Inc. were marked down — and the bank is under water. Nothing had changed except how the loans were valued on the books. Even today, insiders whisper that Wachovia was sacrificed to keep afloat Citigroup, the troubled giant that had first crack at acquiring Wachovia in a deal brokered by the federal government. If true, what else can this be called but outrageous fortune set in motion by the classically tragic figure of Ken Thompson?