What is Wachovia’s Board Thinking?

| About: Wells Fargo (WFC)

Lanty Smith has been a member of the board of directors of Wachovia (NASDAQ:WB) and its predecessor, First Union, since 1987. Over that time, he has voted to approve the following transactions:

  • First Union’s 1997 acquisition of CoreStates Financial for $17.1 billion. The ensuing integration of the two banks was so inept that CoreStates soon lost 20% of its retail customers, who took $9 billion in deposits with them. To this day, First Union’s CoreStates transaction remains the gold standard of bungled bank deals, against which all other screwed-up acquisitions are judged.

  • First Union’s $2.1 billion acquisition of the Money Store, at the very peak of the subprime lending cycle in 1998. The cycle soon turned, and within two years things were so bad the bank shut the unit entirely and took a $3.8 billion charge in the process.

  • Wachovia’s $24 billion acquisition of Golden West Financial, at the very top of the most epic residential real estate bubble of modern history. I don’t need to tell you what’s happened since then.

I have a question. Where does he get off now second-guessing Ken Thompson’s judgment on deals? Over the course of his 21 years as a Wachovia director, Smith appears to never have seen one he didn’t like. In addition to the three fiascoes above, he also approved dozens of smaller transactions that cost shareholders a penny or two here and a penny or two there in foregone earnings per share, that in aggregate added up to shareholder dilution on a massive scale.

So Lanty Smith is not, by all appearances, a zealous guardian of shareholders’ interest.

Which leads me to a second question.  Whose bright idea was it to put Smith in charge of things now?

You’ll get no argument from me that Wachovia’s acquisition of Golden West was expensive and poorly timed. (I even said so at the time.) But I don’t see how firing Ken Thompson now does anything to improve the situation--and I can see a lot of ways it makes a bad situation worse.

More to the point, the bank finds itself in the pickle it’s in now, I believe, because its board—led by Smith—neglected to carry out its fiduciary duties in several material ways. In particular, the board:

  1. Failed to insist Wachovia have a succession plan in place. You want to dump your CEO? Go ahead. But you’d better have Plan B standing by. At Wachovia, it’s not. So now the company finds itself in a more problematic situation that it was prior to Thompson’s ouster: it now must conduct a high-profile CEO hunt from a position of obvious weakness. What kind of bargaining or recruiting edge do you think it will have?

  1. Failed to question the company’s strategy shift back toward acquisitions. Prior to the Golden West debacle, recall, under Ken Thompson’s leadership Wachovia was went from being one of the most dysfunctional of the big banks to one of the very best managed. By the mid-2000s, it consistently topped consumer satisfaction surveys, and showed steady improvement in returns on key profitability metrics. The Golden West acquisition wasn’t a big deal just because it was, literally, a big deal, it was a big deal because it marked a sharp break from the company’s prior, successful strategy. That’s exactly the sort of shift a competent board should question. This board, to its eternal discredit, did not.

  1. Went ahead and approved the Golden West deal. It was no secret at the time that the acquisition and integration of Golden West figured to be dicey. The company had a unique culture that would be tough to merge into a larger organization. Plus, the mortgage cycle looked toppy. Perhaps an active discussion of the deal’s potential negatives might have changed the outcome. But that didn’t happen.

In all, Wachovia’s board’s decisions over the past 18 months have added up to one disaster after another. Is it appropriate for Ken Thompson to take responsibility for what’s happened over that time? Of course. But I don’t see how his departure actually helps shareholders. And the blame for that, in my view, goes straight on the shoulders of Lanty Smith and the other directors. Wachovia shareholders owe them no gratitude.  

Lanty Smith wants Ken Thompson to take responsibility. Fine. He should do the same. Once a new CEO is named, he should follow Thompson’s example, and resign.

Tom Brown is head of BankStocks.com.

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