Sunday, January 11, 2009

Why Wachovia Deserved to Die

When Wells Fargo completed its purchase of Wachovia last week, many of us familiar with what we considered to be its irrational and even immoral practices gave a collective sigh of relief.  But its behavior is indicative of the mess we have created in trying to solve our current economic problems, caused, in large part, by bank behavior similar to that of Wachovia's.

One example should suffice, with the caveat that it is told from my perspective and my observations are only that, my observations.  Last Friday one of Knoxville TN's most prominent companies, Imagepoint, Inc. shut down and 450 people were let go, some without even being reimbursed for the expenses they had incurred on the company's behalf, because Wachovia had "bounced" the checks they were given.  The bank's consultants are in the process of liquidating the company's assets.  Imagepoint had been a fixture in Knoxville for fifty years. It had been profitable, with one exception, for as long as anyone associated with the company could remember.  It was the largest manufacturer and installer of outdoor signage, with BP, McDonalds, GM, and, ironically, Wachovia, among its largest customers.  The one exception to its long history of profitability was 2008 when, in response to the difficulty some of its customers were having with their own businesses, it restructured its own, moving from three plants to one and refocusing its business, successfully, on other market segments.  In the process, it became marginally unprofitable, losing about $1 million in ongoing earnings on sales of about $145 million.

By comparison, in the early 1980's, I was managing a company banking with SunTrust (then Trust Company of GA) and faced an economic downturn of similar proportions, which took a company that had a long history of profitable operations to a slight loss.  Our loan was one of the largest SunTrust (and probably the largest)  had on its books.  Jimmy Williams was the senior account manager and met regularly with our management team.  It was a difficult situation, but SunTrust stuck with us, understood our situation, didn't shut us down (which they had every right to do) and in 1983 the company was sold, SunTrust was paid in full, and the owners made enough money to found a firm, River Capital, that continues today to make investments in small companies around the SE with the intent to see them grow  and prosper.

Contrast this with Wachovia's behavior.  ImagePoint was one of its smallest corporate customers (certainly relative to its size).  Last week it had a revolver loan balance of slightly more than $5 million (against over $30 million of collateral).  More importantly, it had an offer on the table from a reputable group to acquire the company.  In full disclosure, the offer was from Navigation Capital, a firm I helped found after previously helping to found River Capital and Mellon Ventures.  Having completed over 150 investments totaling over $2 billion, I doubt Wachovia had any concern about our willingness or ability to do such a deal. Additionally, I was on the Board of ImagePoint, although not an investor in it.

Let's look at the key dimensions of the deal.  Navigation (and others) offered to put in $10 million of equity and $3 million in a standby debt facility, to be used if necessary to further support Wachovia's loan, which at that time was about $11 million on the revolver.  None of the money was going anywhere other than into the company.  The major shareholder, the company's CEO, was getting nothing and losing his job after running the company successfully for 35 years.  His sole motivation was to preserve the company, perpetuate the management team he had built, and save the agony that has been inflicted upon the 450 employees and 100's of suppliers and customers it served.  The other lenders to the company were exchanging $24 million in debt for a 10% ownership stake in the revitalized company.  In return for $13 million of new money supporting their loan, and all these other sacrifices, what did we ask Wachovia for?  Only that it support the company by continuing to lend it money as it had over the life of its relationship.

Wachovia's reaction:  In short,we met with them on a Friday in December for 45 minutes and they never contacted us again. No negotiation, no discusssion.  Instead, the following Sunday they bounced the checks the company had issued thinking it had $6.5 million in available funds, thereby putting employees, suppliers and customers on notice that the company was in trouble, even as it was considering a sale.  Did they have the right to do this?  Probably.  Was it unconscionable and, from my perspective, even immoral?  You decide.  Did anyone at Wachovia give even a moment's thought to the agony they were inflicting on thousands of people, including the families of those affected?  I doubt it.  I think they just checked with their lawyer to see if they would avoid any retribution for their reprehensible behavior.  Our conclusion, we needed a bank to be a partner with us in this transaction and Wachovia is no longer a bank.  My own reaction: I'm reminded of the refrain from one of the more obscure Rolling Stone's songs, Dead Flowers:  "Send me dead flowers in the morning, and I won't forget to put roses on your grave.".  May the remaining corpses at Wachovia rest in peace (RIP).

So, forget ImagePoint for a moment, why did this happen?  How did we go from a SunTrust understanding a company's problems and working through them, to a Wachovia (now Wells Fargo) that exerts maximum legal leverage at a time a company is most vulnerable to put it out of business?  Isn't this exactly what TARP was put in place to prevent from happening to our nation's homeowners and corporate infrastructure?  Wasn't this $700 billion meant to save jobs, not reward crushing them?  Sadly, as administered, the answer is "no".  Instead of buying troubled assets  and freeing banks to make more loans, we instead invested in their equity and encouraged them to "get rid" of their troubled loans.  End result, Wachovia's behavior.  Sadly, Wachovia is not the exception.  Other well known banks exhibit similar behavior.  A few examples, leaving names unnamed to protect the ongoing relationship I have with some of them.  A large, multi-national bank with no loan balance and no obligation to lend a company any more money ever, blocks the payment with the company's own cash of the interest owed to another lender, putting the company at risk of foreclosure despite its ability to pay.  More jobs lost, who cares?  Not the bank, it is improving its capital ratio, using our taxpayer money.  One of our companies, performing well and in full compliance with all its loan covenants, wants to spend a small amount of the cash on its balance sheet to set up a joint venture with another company (read "new jobs'), and is blocked by its lender.

Finally, I'm not asserting that these (and many other) banks are acting irrationally.  Just the opposite; they are responding to the incentives our policymakers put in front of them. Previously, as illustrated by the SunTrust example, bankers saw themselves as partners with businesses in their communities to help them grow and prosper, create jobs, and build an economy that would allow the bank itself to thrive.  It didn't require billions of taxpayers' dollars to get them to do so, they saw it as their role in a just and humane society whose long-term success contributed to their own.  Now that we are spending billions on solving their self-inflicted problems, can't we expect and incent our bankers to recognize a situation where, like SunTrust, they can preserve a company, save some jobs, and prosper at the same time?  "Yes we can." 


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Hyde On Health Reform said...
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