Not All Faith in Financials Need Be Shot
June 2nd, 2008 by 
James Cullen
Sometimes, it just takes people slightly longer than it would take you to fire their friends. After many months of calls for Kerry Killinger to bear some responsibility for the mess he led Washington Mutual (WM) into, decided to split the Chairman/CEO role Killinger had and name an independent director to head up the board. With Washington Mutual stock having lost more than 70% of its value in the last two years amidst waves of loan loss provisions, eventually being forced to undergo a hugely dilutive $7 billion capital raising offer, one has to wonder how long Killinger can maintain his remaining position. I don’t think it’s far-fetched to say that Washington Mutual looks like it is undergoing a controlled version of what’s happening at Wachovia (WB)…
…where CEO Ken Thompson was essentially invited out of his position. As Felix Salmon of Portfolio.com notes, it took less than one month for Thompson to go from Chairman and CEO, to CEO, to jobless. Wachovia is now being run by an interim CEO, an interim COO, and a board chairman who has had the position less than one month. This rapid deconstruction of the top of the executive management team won’t give Wachovia the do-over is needs after the $25 billion Golden West purchase, and except for the small emotional victory, I don’t see what it’s going to accomplish to have a huge bank undergoing substantial internal upheaval. It should be interesting to see who is willing to step up and willingly inherit the mess that is Wachovia (or Washington Mutual, for that matter - if and when the CEO role opens up), and what kind of pay package it will require.
I don’t typically talk about corporate governance, but there are cases were egregious errors of judgment are made, and while the person (people?) at the top might not have been direct actors, they are responsible. Someone needs to fall on the sword, and that usually needs to be the person at the top to clear the slate and allow things to move on. I don’t like either of these stocks because of the skeleton-in-the-closet potential with the as-yet-unknown bad loans. There are plenty of better interest-rate levered financials.
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June 3rd, 2008 at 12:02 pm
Ken needed to go. He had a substantial role in Wachovia’s decision to buy Golden West at the top of a real estate bubble for a substantial premium, which, as history has proven out, was a horrendous decision. Luckily I recognized the writing on the wall in the summer of ‘07 and sold out of my position before the meltdown.
I am still on the fence about WB’s purchase of AG Edwards. Solid company, but also at a high price considering conditions in the investment banking industry today. I think Wachovia had become a one-trick pony with growth through acquisitions, which isn’t working in today’s banking environment. Too much unproductive, dangerous assets ready to bring the ship down. The end of a gilded age I suppose.
June 3rd, 2008 at 7:27 pm
Rick,
Very well put, and good move getting out when you did. Also, really like the last line - “end of a gilded age” - which sadly sums up alot of financials that cashed in but are no longer around. The real questions remaining is who (if any) of the big boys falls next.