Volume 95, No.5, September-October 2009

Crisis Managers
by William D. Cohan
CEO summit: White House meeting with President Obama included, from left, Bank of America's Ken Lewis, Wells Fargo's John Stumpf (partially obscured), U.S. Bancorp's Richard Davis, Morgan Stanley's John Mack, Citigroup's Vikram Pandit, and Freddie Mac's John Koskinen.
CEO summit: White House meeting with President Obama included, from left, Bank of America's Ken Lewis, Wells Fargo's John Stumpf (partially obscured), U.S. Bancorp's Richard Davis, Morgan Stanley's John Mack, Citigroup's Vikram Pandit, and Freddie Mac's John Koskinen.
Getty Images

"I have 47,000 people working at Morgan Stanley, and, as I said to some of our regulators, just from a public-policy point of view, how does that make sense? I understand from their point of view, and I don't begrudge any of the regulators doing what they did. They were trying to solve a much bigger problem, and if I were in their shoes, I'd have done the same thing. My job and the job of my board was—and is—to protect shareholders. And we did not think it was in the best interest of the shareholders. Unfortunately, it wasn't one of those where you sit down and have a meeting and discuss it. You're on the run. You're on the phone, going back and forth. But I couldn't do it to the people that worked for me or the shareholders."

There were some scary moments for the firm as rumors swirled in the market about whether Mitsubishi would complete the deal with Morgan Stanley or renegotiate it in a material way. About a week after Lehman failed, Mack recalls he told his wife, Christy, "There's a chance I'm going to lose this firm." Thirty seconds later he added, "But I'd rather be doing this than reading a book in North Carolina," referring to a popular retirement spot.

"And as crazy as it was, it was also as stimulating as anything I've done, and I think my team's ever done." In the end, after a series of tense negotiations, Mitsubishi closed the deal with Morgan Stanley on the original terms. Both Morgan Stanley and Goldman Sachs became bank holding companies, meaning they could have virtually unfettered access to the Fed for short-term borrowing, giving a huge boost to the security of their short-term borrowing needs and eliminating future concerns about liquidity. Since its low, Morgan Stanley's stock has increased nearly fivefold, to around $30 per share.


The day after Lehman filed for bankruptcy and AIG was rescued—to the tune of $85 billion of taxpayer money—Lanty Smith, the Wachovia chair, called a Wachovia board meeting so CEO Bob Steel could tell them how he intended to have Wachovia grapple with the rapidly deteriorating financial situation. Steel says he laid out six strategic options, ranging from "staying the course" to finding a new outside investor for "$10 to $15 billion" of capital to selling the company. "We're going to look at all six," Steel told board members. "I'm not going to be left with trying to pull on strings at the last minute. I think we should be evaluating all six lanes. I didn't want to end up in a corner with no way out." While stating a preference for remaining independent, the Wachovia board authorized Steel to pursue them simultaneously.

Steel had a conversation with Mack about a possible merger of Wachovia and Morgan Stanley. Confidentiality agreements were signed, but that effort soon fizzled. Then, Vikrim Pandit, the CEO of Citigroup, called and e-mailed Steel, beginning a furious two weeks of negotiations among Steel, his financial advisers, and a wide range of financial institutions and government regulators around the globe about whether to make an investment in Wachovia, to buy pieces of its business, to buy the whole company, or to put the company into receivership. Both Goldman Sachs and Morgan Stanley had become bank holding companies on September 21. The government forced Washington Mutual into the arms of JPMorganChase about the same time. Congress voted down the first version of Paulson's Troubled Asset Relief Program on September 30, 2008. Wachovia was teetering on the edge.

At about 4 in the morning on September 29, Sheila Bair, the chair of the Federal Deposit Insurance Corporation, informed Steel that the FDIC had decided that Citigroup would acquire Wachovia's banking operations and that Steel should rapidly negotiate a deal with Pandit. The idea was for the government to provide billions of dollars of assistance to Citigroup, which was also ailing, so it could acquire the banking business of Wachovia, while the firm's brokerage businesses would become independent. The deal, as proposed, was plenty complicated. In the end, Citigroup and Wachovia reached only an "agreement-in-principle," well short of a legally binding merger agreement.

At 7:15 p.m. on October 2, Bair called Steel and told him he would be hearing from Richard Kovacevich, the CEO of Wells Fargo, about a deal that was superior to the Citigroup proposal and that would not require government assistance. Kovacevich had looked at Wachovia in the previous weeks and had passed. Now, it seemed, he was back. Since Bair had first told Steel to do a deal with Citigroup and now was telling him to do a superior deal with Wells, Steel listened carefully. "Her enthusiasm was pretty clear," he says.

Steel left New York, where he had been meeting with the Citigroup executives, and headed back to Charlotte, where Wachovia is based. When he landed in North Carolina, his cell phone rang. It was Kovacevich. "'Bob, our board met today, and we decided that we'd like to make a proposal for all of Wachovia with no government assistance for $7 in Wells Fargo stock,' " Steel recalls he said. " 'I'm pushing send, as we speak, on a copy of the merger agreement. It's been signed by me and approved by our board, and this is the merger document that you guys gave us last week.'" Wells had not changed a word in the document.

Steel quickly convened a board meeting to consider the offer but knew "it was a hairy situation." Wachovia had a handshake deal with Citigroup—the agreement in principle—but the Wells offer was financially superior to the Citigroup proposal. "You can see pretty quickly that I'm going to be sued by somebody," says Steel now. "I'm either going to be sued for violating the exclusivity agreement [with Citigroup], or I'm going to be sued by the shareholders for not showing them a better deal. I don't think that's a very hard call. And so we accepted the merger agreement. I signed it and sent it back at about 2:30 that morning."

Steel also called Bair at home at 3:30 a.m. and told her the Wachovia board had voted to accept the Wells offer. She suggested that they together call Pandit at Citigroup later that morning. Steel didn't want to wait. "We're calling him right now," he told Bair. "I'm not going to have Vikram wake up and read in the paper about this. I've known him for twenty-five years, and he's a first-class guy, and so we should call him right now. And you should be on the phone, too, since you're the person who introduced me to Vikram, and now you've introduced me to Wells Fargo."

Together Steel and Bair called Pandit's cell phone. It was 3:45 a.m. Steel recalls telling Pandit, "There's been a pretty important development I need to fill you in on. If you want to get up and wash your face or something, go ahead, but this is a for-real call." Steel then told Pandit about the Wells offer and the Wachovia board's acceptance of it. According to the proxy statement sent to shareholders about the Wells-Wachovia deal, Pandit told Bair and Steel he believed that Wachovia was in breach of the exclusivity covenants of the Citigroup letter of intent and appealed to Bair to consider "the effect of this development on systemic issues" unrelated to Wachovia.

"He was pretty disappointed—which is an understatement," Steel says. On January 1, Wells completed the acquisition of Wachovia. Steel is now on the Wells board of directors. He remains entrenched in litigation with Citigroup, which sued him and Wachovia on October 6 over the collapse of the deal.


John Koskinen was making his way in his new job at Freddie Mac, despite the difficulties inherent in finding new board members for a company in receivership: Very few people want to serve on the board of a company controlled in nearly every way by the government. Even so, he was succeeding, when he was faced with a series of even more unexpected and dire twists and turns.

On March 2, 2009, David Moffett, his CEO, resigned unexpectedly. Then, on April 22, David Kellerman, the forty-one-year-old acting CFO of Freddie, committed suicide. "Obviously, it's been a complicated time around here," Koskinen says. "I'm beginning to feel like a one-armed paperhanger. I am now the CEO, COO, and CFO—a situation I hope to change in the near future." (The Wall Street Journal reported in late June that Charles Haldeman Jr., the chair of Putnam Investments, would succeed Koskinen.)

"It's been a stressful time," Koskinen adds. "Everybody says—and I think it's appropriate—that people who become unemployed wherever they are have major stress in their lives. But it's not as if there's a free pass for people who manage to have their jobs but find they're in the middle of these cauldrons."

While Koskinen hopes to be out of a job soon and back in retirement mode, Steel hopes to resurface somewhere important. Having left Wachovia after the Wells merger, he now spends his time as the head of Grigg Street Capital, a small firm in Greenwich, Connecticut, and as the chair of the Aspen Institute. He and a group of other investors considered buying Cowen, the investment bank, and taking it private. Another investor ultimately bought it. And his name has been bandied about as a possible successor to Ken Lewis, the CEO of Bank of America (also based in Charlotte), should Lewis retire or be removed. Steel denies being in the running for the job or that a change is imminent.

Mike Alix is enjoying himself at the New York Fed. Both Dimon and Black remain senior executives at JPMorgan. And John Mack still runs Morgan Stanley. (Although he observes that it is "healthy" to get "fresh blood to run a company," he says, "I've got a lot of energy, so I'm prepared to do this for a long time.")

As for Alan Schwartz, some eighteen months after the demise of Bear Stearns, he has resurfaced as executive chair of Guggenheim Partners, a private investment firm that manages the money of New York's Guggenheim family. Schwartz is working with his existing clients, mentoring younger employees, and helping other executives at Guggenheim on overall business strategy. Asked this past June by The Wall Street Journal whether he would have done anything differently at Bear Stearns when the company was on the precipice, he said, "No, I'm at peace with that. It's time to move on."        


Editor's Note: John Mack announced in September 2009 that he
will step down as CEO of Morgan Stanley at the end of the year.

Duke Magazine'The New York Times House of Cards: A Tale of Hubris and Wretched Excess on Wall StreetFortuneThe AtlanticThe New York TimesThe Washington PostThe Financial Times




return to page one of this article