What you can learn from bailout CEOs

Financial Follies

Written by Alexandria Chun, Staff Writer

Image obtained via Roberto_Ventre on Flickr Creative Commons

Over the last five years or so, the term ‘bailout’ has become increasingly employed. It refers to the act of lending capital to save institutions from bankruptcy. The recipients of bailouts range from companies and banks to entire countries. In fact, several European nations are currently petitioning for bailouts to save their declining economies.

From Wall Street to Main Street, bailouts have been able to stave off economic collapse. Case in point, the Troubled Asset Relief Program (TARP), which involved a government injection of $700 billion dollars to keep several major American financial institutions afloat during the financial crisis of 2008. Recipients included several banks, the insurance company AIG, and mortgage providers Fannie Mae and Freddie Mac. The CEOs of these banks and companies each received multi-billion dollar loans and tried to steer their companies away from the verge of bankruptcy. They were essentially given a second chance. However, some fared better than others. Let’s take a look at a few of these major players to determine the best and worst of bailout CEOs.

– Ken Lewis, former CEO of Bank of America

Bank of America had been one of the largest banking institutions in the United States up until the financial crisis. So when talks of bailouts and acquisitions were on the table in September 2008, Lewis took this opportunity to buy out Merrill Lynch at a discount $29 per share (compared to their $66 price just six months earlier) to become THE largest banking institution in the United States. While this sounds like a great move on Lewis’ part, what he and his team failed to do was carefully review all of Merrill’s books before sealing the deal. It turns out, Merrill was rapidly sinking from larger-than-expected losses and continued exposure to volatile market conditions, and was dragging Bank of America down with it, forcing America’s largest bank to take a second TARP loan from the government.

[pullquote]One good act does not cover for bad ones that follow.[/pullquote] Lesson learned: Check the books, check them twice.

– John Thain, former CEO of Merrill Lynch

On the other side of the Merrill Lynch acquisition was John Thain, who helped engineer the whole thing. The price was not as high as he would have liked, but it was low enough to secure the deal, which was all that mattered at that point since Merrill was competing for Bank of America’s attention with Lehman Brothers. Thanks to Thain, Merrill was saved. But shortly after, problems arose between Thain and his new parent company. He was reported to have awarded larger bonuses to former Merrill employees, spent what many agree was a ludicrous amount of money renovating his office, and on top of that, had to answer for the controversial losses concealed from Bank of America before their deal. This, of course, did not leave a very good impression. Thain was dismissed and later appointed CEO of the then failing CIT Group, where he has since nursed the company back to health.

Lesson learned: One good act does not cover for bad ones that follow.

– Jamie Dimon, CEO of JPMorgan Chase

Dimon has been arguably the most successful of the bailout CEOs. Not only did his bank manage to survive the financial crisis of 2008 relatively unscathed, JPMorgan was stable enough to not even need the bailout in the first place. In addition to this, Dimon acquired two major banks, Bear Stearns and Washington Mutual, at discount prices without suffering massive losses as Bank of America did with Merrill. Yes, the government did guarantee the toxic assets accompanying the deal. But the likelihood that Dimon would have agreed to take on such a dangerous asset without any insurance is very small. So what is Dimon’s weakness? Risky trading. He likes to make large, complex bets, reckoning they will reward him with large profits. And in most cases, this has worked in his favour, as seen by their earnings. But on the flip-side, large risks can result in large losses, like last May when JPMorgan reported a $2 billion loss on a risky investment that Dimon himself had approved.

Lesson learned: High risk, high return. Never forget that.

– Vikram Pandit, CEO of Citigroup

Although it wouldn’t be accurate to judge a CEO’s performance based on their company’s share prices, it is reasonable to assess them based on their how much they were able to return to their investors. If this is the case, Vikram Pandit tops the list for least shareholder value. In all fairness, he was dealt a very poor hand. When he was first appointed CEO, Citigroup had just emerged from bankruptcy and was having difficulty regaining its footing. Pandit was unprepared to tackle the colossal task of making an oversized, failing bank profitable again. And while he has improved risk management by reducing leverage and streamlined the company, it has taken him nearly three years and two government loans totaling $45 billion dollars to turn a profit at the cost of his reputation.

Lesson learned: Always know what you are getting into.

From this, we can see that there is no clear-cut way to determine who is a good CEO and who is a bad CEO; there is only better and worse. Though each had varying degrees of pragmatism, none were flawless. Hopefully they can provide us with some insight on what not to do when managing a company under duress.

Sources:

– BBC (Merrill Lynch sold in $50bn deal)
– Bloomberg (Merrill’s Thain Said to Pay $1. 2 Million to Decorator)
– Bloomberg (Bank of America to Acquire Merrill as Crisis Deepens)
– Merrill Lynch and Company
– NYMag (The Most Powerless Powerful Man on Wall Street)
– NYTimes (How Merrill was Saved and Lehman was Lost)
– NYTimes (JPMorgan Discloses Significant Losses in Trading Group)
– NYTimes (Thain Resigns Amid Losses at Bank of America)
– NYTimes (Tracking the $700billion Bailout)
– SeekingAlpha (Citi well positioned in 2012)
– FT.com (JPMorgan to Buy Bear Stearns for $236m)
– TeleGraph (JPMorgan buys Bear Stearns for $2 a share)