Wachovia: One Thompson Deal Too Many

The board referred to a series of setbacks, but paying $25 billion for Golden West Financial at the housing bubble's peak clearly led to the CEO's ouster

by Dean Foust

Former Wachovia CEO Ken Thompson Bloomberg News/Landov

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In his first five years as chief executive of First Union—later to become Wachovia (WB)—Ken Thompson was the antithesis of a big-bank CEO. While his predecessor, Ed Crutchfield Jr., famously said that during merger negotiations he "just kept stacking billion-dollar bills on the table" until the other party relented—a bet-the-bank approach that led to his ouster in 2000—Thompson was a master at carefully hedging his every bet.

Just a year into the job at First Union, Thompson deftly talked fellow North Carolina bank Wachovia into a "merger of equals." The deal gave Wachovia shareholders a scant 6% premium for their shares. (Thompson also took Wachovia's name for the combined bank, allowing him to bury the First Union brand, which had become tarnished by Crutchfield's disastrous dealmaking.) And in 2003, Thompson convinced Prudential Financial to enter a joint venture that pooled Prudential's 4,400 retail brokers with Wachovia's middling brokerage operations—without requiring Thompson to write a check. That gave Thompson a coast-to-coast network of 12,000 brokers to peddle Wachovia's mortgages, car loans, and other consumer-banking products as well as securities, for just the $400 million it would cost to close redundant branches and combine computer systems.

Under Thompson, Wachovia improved its customer service so much that it was the perennial top performer among banks in national surveys, such as those conducted by the University of Michigan. This attention to detail, coupled with his shrewd dealmaking, won Thompson many fans among Wall Street investors, who bid Wachovia shares up 40% by the time of the Prudential deal.

A Series of Missteps

But Thompson's reign ended abruptly on June 2, when Wachovia's board announced Thompson "had retired at the request of the board." It was just the first of two big blows for bank chiefs beset by mortgage woes: The same day, Washington Mutual (WM) said it was replacing Kerry Killinger as chairman. He remains CEO of the nation's largest savings and loan. Seattle-based WaMu said independent director Stephen Frank will take over July 1 as chairman. Killinger, 58, has been under mounting pressure over his bad bet on risky adjustable-rate mortgages. During the first quarter, WaMu lost more than $1.1 billion and set aside $3.5 billion to cover defaulted loans.

While the Wachovia board judiciously said Thompson's ouster wasn't due to any single event but rather to "a series of previous disappointments and setbacks," it was painfully clear Thompson's downfall stemmed from his one and only major deal: his $25 billion acquisition two years ago of Golden West Financial, a large mortgage lender that has been hammered by the housing busts in California and Florida.

In hindsight, it would be easy to ascribe Thompson's decision to buy a mortgage lender at the height of the housing bubble to executive hubris. But it may have been more that Thompson was battling the same problem that bedevils the rest of today's megabanks: The law of large numbers. Because by 2006, Thompson's many small deals—the Prudential venture, the acquisition of Alabama bank SouthTrust—weren't moving the needle in terms of profits. And it was about that time that Thompson began hunting bigger game: After taking a pass when FleetBoston Financial put itself on the block, Thompson flirted with MBNA before rival Bank of America (BAC) jumped in and walked away with the credit-card giant.

Golden West: A Problem from the Start

According to one Wachovia insider, Crutchfield's downfall came when "he stopped listening" to his other executives. Likewise, it's hard to believe Thompson didn't get resistance from his own management team about buying Golden West—and ignored it.