At a party before last month's Wachovia Championship, bank clients and VIPs were preparing for a sun-splashed week at Quail Hollow Club watching the world's best golfers.
The Charlotte bank had suffered a tumultuous spring. But chief executive Ken Thompson's mood was good.
“Why wouldn't it be?” says Charlotte businessman Cameron Harris, who saw his friend at the event. “He didn't know his board would turn on him.”
A month later, Thompson, 57, would be out of a job, forced to retire by the board after eight years at the helm and 32 years at the company. People who know Thompson say he was surprised by the timing and disappointed. He had been determined to turn the bank around.
Just two years ago, Thompson's ouster would have been unthinkable. Wachovia's stock had appreciated significantly under his tenure, he'd revitalized customer service and his acquisitions had cemented the bank as a long-term player in the industry.
The former Rocky Mount high school sports star had become a respected figure on the Charlotte civic scene and in the banking world. Earlier this year, he rose to chairman of a prestigious industry trade group.
His decision, however, to buy mortgage specialist Golden West Financial in May 2006 at the peak of the housing boom would prove a pivotal blunder. The deal flayed his reputation as a cautious buyer and later unleashed burgeoning loan losses.
Against this backdrop, a rash of missteps in April and May that raised questions about management's grip on the company's business practices ultimately would cost Thompson his job. The bank's board, led by influential chairman Lanty Smith, decided that cumulative “disappointments and setbacks” required a new leader.
Smith, a director for 21 years, had backed Thompson's deals over the years and voiced support for him just weeks earlier. In an interview, he said the decision was difficult because Thompson was a friend, but board members had a “higher obligation to the company, its shareholders and its employees.”
In March, as Thompson's troubles were building, state Rep. Ruth Samuelson, R-Mecklenburg, ran into him at the Foundation for the Carolinas annual meeting at the Charlotte Convention Center. Thompson, who declined to comment on his departure, was set to become the philanthropy's chairman.
Samuelson, who valued his counsel over the years, gave him a hug and told him she was praying for him. “It must not be working,” he joked, Samuelson recalls. He added: “This is the hardest thing I've ever had to go through.”
N.C. Gov. Mike Easley, a boyhood friend from Rocky Mount who regularly seeks his economic advice, talked to Thompson about a week ago, when his departure was already underway. Thompson was handling it well and praised the company and its employees, Easley said.
In high school, Thompson would chew out teammates who didn't give their full effort on the football field. Easley knew Thompson had driven himself just as hard over his three-decade career. “I told him, ‘You need to take a break,'” Easley said.
First Union-Wachovia merger
Thompson had long been a rising star when he took over in 2000 as CEO of First Union, which would later become Wachovia. An internal survey of First Union's top 30 leaders showed he ranked No. 1 in three categories: integrity, leadership and teamwork.
Known as an approachable hard worker, his first task was to revive a company suffering indigestion from rapid-fire acquisitions under predecessor Ed Crutchfield. In a massive restructuring, he closed poor-performing units, slashed jobs and sold off businesses.
His next stroke was a surprising in-state merger in 2001 with Winston-Salem-based Wachovia, which allowed the company to cut costs and chase more customers in wealthy markets. The deal carried a relatively low price tag, and First Union took Wachovia's more respected name. The combined company soon unveiled a new marketing tagline: “Uncommon Wisdom.”
Thompson frequently labeled Wachovia a survivor in a consolidating industry and forged deals to absorb Prudential Securities in 2003 and to buy SouthTrust bank in 2004. But he passed on riskier purchases of FleetBoston Financial and credit card issuer MBNA. Both companies ended up in the hands of Charlotte rival Bank of America.
“I don't think Ken ever regretted missing on those deals,” said a source familiar with the situation. “He wasn't a deal junkie.”
Instead, he started a credit card operation from scratch, built branches in California and hired mortgage loan officers. But these moves were slow and expensive. At times, he expressed frustration that his stock price appeared to suffer because of Wall Street's nervousness about another big deal.
In the spring of 2006, Golden West approached Wachovia about a sale. The Oakland, Calif.-based savings and loan would give Wachovia an immediate beachhead in California, plus a mortgage business that historically had fared well in tough economic times.
Wachovia mortgage executives were surprised because the bank had stayed away from the kind of risky loans that Golden West offered. The deal, approved by the board, came together in 11 days and immediately faced investor backlash because the housing market was showing signs of slowing.
Later, analysts would question whether Wachovia did a thorough enough examination of Golden West's portfolio. But the source familiar with the situation said the bank's biggest mistake was not predicting such a precipitous decline in the housing market.
As the deal was coming together that summer, Thompson remained optimistic. “We think we got the right mortgage company,” he said in an interview.
Mortgages go downhill
While many financial institutions were blindsided by the depths of the housing collapse, Wachovia faced particular pitfalls.
Golden West's so-called Pick-A-Payment mortgages would end up souring faster than traditional mortgages. These loans allowed customers to pay less than the necessary interest, inflating borrowers' balances. They also were concentrated in hard-hit California markets.
Next, in the second half of 2007, a credit crunch whacked investment banking operations at Wachovia and peers. The bank took billions of dollars in writedowns because the value of mortgage-related securities had plunged. Profits sank 19 percent to $6.3 billion in 2007, the first down year since 2000.
Some analysts also were worrying about another recent Wachovia deal: last year's $6.8 billion buyout of brokerage A.G. Edwards. They wondered if the bank could retain top brokers and clients.
A vocal opponent was Ben Edwards III, the retired A.G. Edwards CEO, whose successor forged the deal. In an interview, he said he's heard a lot of dissent within both companies. “I think it was an ill-advised thing from the get-go,” said Edwards.
Wachovia's board expressed its displeasure by eliminating bonuses for Thompson and his lieutenants. In January, Smith said management and the board shared blame for the Golden West deal but told the Observer that he had confidence in Thompson and his team.
In his letter to shareholders in February, Thompson said the bank's deals were on track, but he acknowledged the bad timing of the Golden West purchase. He reiterated a previous statement that the bank's dividend was safe.
Then came April's stunning announcement. The bank disclosed a first-quarter loss of $393 million, cut its dividend by 41 percent and announced a costly cash infusion. Thompson said the move had become necessary because new data showed an acceleration of loan losses.
His credibility was gone with investors.
Some ‘self-inflicted' wounds
At the bank's annual meeting April 22, shareholders crowded an uptown hotel ballroom to call for Thompson's resignation. He responded that he was the right person to lead a recovery. Smith again expressed confidence in Thompson.
But a steady drip, drip, drip of miscues followed.
In a 12-day period, the bank agreed to a $144 million settlement over its ties to telemarketers, faced a report that it was under investigation for alleged money-laundering violations, disclosed an expected $1 billion charge over controversial leasing transactions and revealed an insurance loss that nearly doubled its first-quarter red ink.
On May 8, the week after the Wachovia Championship, the board voted to hand Thompson's chairman title to Smith, who was then lead independent director. Thompson said the move let him focus on running the company; analysts said it could mean he was on a short leash.
Four days later, Thompson spoke at an investor conference in New York. Normally, these sessions feature relaxed presentations by CEOs highlighting their successes. Thompson took a serious tone. He admitted Wachovia had some “self-inflicted” wounds and said the bank would hire a third-party group to analyze its risk-management practices.
“My job is to address the problem head-on, and that's absolutely what I intend to do with 100 percent commitment,” he said.
For months, Thompson had been working long hours and eschewing vacations, Harris said. Meanwhile, chairman Smith was seeking counsel.
About a month ago, Smith called former Wachovia chairman Bud Baker to get his thoughts on the company. Baker, who retired in 2003, said he didn't ask if the board was considering a CEO change, but he told Smith it was “a decision they would have to make,” adding: “At the end of the day, the board works for the shareholders and not management.”
Smith wouldn't disclose details on the board's decision-making, but said there comes an “inflection” point in an organization when new leadership can be an energizing force. Those who know Smith said he is a strategic thinker who doesn't make snap judgments.
Baker, who engineered the First Union-Wachovia merger with Thompson, said he had no knowledge of the board's workings but wasn't surprised by the move. Baker has sold some of his Wachovia shares over time and plans to give more away to charity, but he noted his family's holdings have lost half their value with the stock's plunge in the past two years.
Thompson was “in a situation where he made some moves that didn't work out,” Baker said. “Sometimes in life that happens. We all make decisions that don't work out.”
To assist with his retirement agreement, Thompson enlisted the same lawyer who counseled Merrill Lynch CEO Stan O'Neal on his exit. Thompson entered the agreement June 1, the same day Wachovia's board met in New York to install new leadership.
Search begins for new CEO
Early on Monday, Wachovia announced the startling news: Smith would become interim CEO, while vice chairman Ben Jenkins would serve as interim chief operating officer. The bank would launch a search for a new CEO, considering internal and external candidates. Such a hunt could take three to four months, a knowledgeable recruiter said.
The move saddened employees who had known Thompson for years and raised questions about the bank's future, including the possibility of a takeover. Smith said Wachovia planned to remain independent and still had strong businesses.
Some analysts questioned whether Smith was the right person to take charge, citing the board's approval of the Golden West acquisition. Wachovia's shares fell more than 15 percent last week to $20.13, a level last seen in late 1994.
Thompson's plans are unclear. He's required to step down as chairman of the Financial Services Forum because he isn't a sitting CEO. Other companies and charitable causes, including the Foundation for the Carolinas, expect him to stay on their boards. Easley said Thompson will have an array of options. He'd like to tap him for a state board.
Thompson received $1.45 million in severance. He also left with about $28 million in pension benefits, deferred compensation and stock holdings that have since shed some of their value. His stock options are currently worthless.
Hugh McColl Jr., the former Bank of America CEO and a friend, said he doesn't know what Thompson will do next but expects he will fare “quite well.”
“I think he'll still be involved in our city,” he said. “He's a very important leader.” Staff writer Christina Rexrode contributed.