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New Broom at the Big Board


Even his most loyal defenders acknowledge this: When a disgraced Richard A. Grasso left the New York Stock Exchange on Sept. 17 in the wake of the furor over his $188 million pay package, he left behind a world-class mess. The NYSE's image was in tatters, institutional investors demanded ouster of the board, and floor traders feared changes were afoot that would destroy their franchise. So on Sept. 21, when the NYSE board named former Citi boss John S. Reed as interim chairman and CEO, the relief was almost palpable.

But nobody is breathing easy just yet. Not the still-jittery floor community. Not investors. Not the NYSE's much-ridiculed board of directors. And, above all, not Reed. The Securities & Exchange Commission is counting on the 64-year-old retired banker to start the beleaguered exchange on the road toward what could be a dramatic transformation. Although he lacks hands-on experience in the securities industry and will likely face powerful pressure for inertia, Reed is no stranger to corporate transformation. Says James Dimon, CEO of Bank One (ONE) Corp. and a former Citi colleague: "He understands technology. He understands global capital markets, the global role for the New York Stock Exchange. He clearly is respected on issues like corporate governance."

Friends and associates describe a cerebral, worldly -- as well as somewhat distant and cold -- intellectual who is the polar opposite of the emotional, narrowly focused college dropout Grasso. After a banking career in which he presided over a technological revolution in retail banking, the Chicago-born Reed left Citigroup in 2000 after losing a bruising power struggle with co-CEO Sanford I. Weill. Friends say he is probably relishing a second chance to end his career on a high note. Says his friend Yacine A?t-Sahalia, director of Princeton University's Bendheim Center for Finance, where Reed lectured in 2002: "It was almost a question of duty -- a call to duty. He's not the kind of guy to escape a draft."

PRESSURE, PRESSURE

Reed's first challenge, when he starts work on Sept. 30, will be to make major changes in the exchange's widely discredited corporate governance. He is being pressed to wield an ax against some of the most conflicted or weak NYSE board members. A top SEC official asserts that "a lot of people whose judgment is questionable are making major decisions, and that's a worry" -- and named NYSE Director H. Carl McCall, a former New York state comptroller who heads the compensation committee and the governance review committee. McCall did not return calls seeking comment.

Clearly, the status quo is no longer an option -- not with pressure from all sides. On Sept. 24, seven state treasurers gave the NYSE board a laundry list of proposals, including a complete overhaul of the board. They also want the SEC to appoint an independent panel to probe NYSE operations and governance. New York Attorney General Eliot Spitzer says approval of the Grasso pay package represented a "breakdown in board behavior." That day, Reed told Bloomberg News Service that he would cut the board to 10 or 12 members, down from its current 27, and that he will stay on the job for only about three months.

WHO'S NEXT?

The sec is watching with intense interest. A top official says the agency staff and Chairman William H. Donaldson have little enthusiasm for one proposal -- the creation of a nonexecutive chairman, instead of the current combined CEO-chairman setup. But the agency might favor an arrangement that would allow the NYSE and other markets to keep their own surveillance units, while shifting enforcement to a single regulatory body. A host of NYSE constituencies, from investors to floor brokers, are also calling for increased disclosure.

A saving grace, from Reed's perspective, is that floor traders -- a notoriously conservative lot -- now recognize that governance changes, and even beefed-up regulation, are inevitable. This is part disgust at Grasso-era excesses, part "if you can't beat 'em, join 'em" pragmatism. "Corporate governance needs to be addressed immediately," says one influential Wall Street CEO whose firm wields power at the NYSE. "Reed has to stabilize the situation, get people on the road to reform, and get credibility back."

Probably the biggest short-term issue is succession. Although various names of permanent CEOs have been bandied about -- notably Peter R. Fisher, a Treasury Under Secretary who was considered for interim chairman -- sources familiar with the board's deliberations that the decision is up to Reed and that he is likely to set up his own search committee.

Just as vital is the NYSE's review of its corporate governance practices, originally due to the SEC on Oct. 2. With the current board rapidly losing its remaining clout, that date has been delayed to give Reed a chance to put his stamp on it. "What the existing group has done should be considered just one input," says a top SEC official. "Even if they are capable of coming up with the right answers, Reed has to validate it by taking the board through a process that he designs."

THE NEW GUY

Straightening out the corporate governance debacle is thorny enough -- but it's a cinch compared with the NYSE's long-term issues. There is, for example, the fate of the trading floor -- long defended by the exchange as the best way to set prices but lambasted by critics as an outmoded system that hurts investors. Regulations that protect the NYSE franchise are now in danger. The Exchange will probably be forced to accept some kind of change in its previously sacrosanct "trade-through" rule, which prohibits orders from being executed off the floor if a better price is available on the floor. That hurts NYSE competitors that provide faster executions, which institutional investors often prefer over best prices.

In confronting such long-festering issues -- and a potentially troublesome SEC investigation of the trading floor -- it may help that Reed is new to the Street. He has no vested interests to protect. Herbert M. Allison Jr., an NYSE board member who is chairman and CEO of TIAA-CREF, notes that Reed "has not had close relations with the exchange and he has moral courage." His detached, intellectual approach is also a plus. His friend Michael Doyle, a Columbia University professor, notes that Reed is "deeply appreciative of science and rigorous methods. He is fascinated by tough questions." That's good news. Tough questions abound at the NYSE. But tough answers are about as hard to find as a once-plentiful commodity: defenders of Dick Grasso. By Gary Weiss in New York and Paula Dwyer and Amy Borrus in Washington, with bureau reports


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