When the crisis broke, Hagedorn's first worry was counterparty risk. "Many of us questioned whether the things we believed about financial institutions were, in fact, true — were they as healthy as we thought they were?" For example, UMB settles its international securities trades with a major commercial bank. Would it be forced to find another provider? (An analysis determined it wouldn't.)
Credit risk was another concern. Would loan defaults skyrocket? In both cases, the bank's small size and old-fashioned, hands-on approach to business served it well. Assessing counterparty risk, for example, is not an activity that can be dictated from on high. "You have to dig down in your organization and find out exactly what's going on," Hagedorn says. "We told our people to go out and involve employees at all levels to make sure they understand risks in the business."
Similarly, credit risk was helped by the fact that every large, complex product goes through a loan-review group staffed by analysts and lenders with industry and business-cycle expertise. Hagedorn calls the approach fundamentally different from the "quant shops" — the large banks that put commercial credits through a credit-scoring system that determines approvals.
Far more straightforward was the bank's rejection of TARP money. The senior executive team evaluated the proposal from every angle. "Ultimately, the decision came down to principles," Hagedorn says. "We didn't think it was good public policy for any [commercial outfit] to take taxpayer dollars. And, frankly, we didn't need it."
UMB feels vindicated, in part, because of how TARP funding ultimately came to be perceived. Initially pitched by the Treasury Department as a way to send a signal of strength to the market, and as a source of funding by which stronger banks might acquire weaker ones, it has in fact proven to be the opposite. Accepting the money was widely seen as a sign of weakness, and Hagedorn says that despite plenty of effort, UMB found few potential Federal Deposit Insurance Corp.–assisted deals worth pursuing.
E-Trade: Back to Brokerage
Talk about the challenges of a new job: Bruce Nolop joined E-Trade Financial as the online brokerage and banking firm's CFO on September 12, 2008 — three days before Lehman Brothers declared bankruptcy.
Nolop, previously finance chief at Pitney Bowes, knew there were problems with the mortgage-loan investments of the company's bank, stemming from its 2001 acquisition of LoansDirect.com, but he thought E-Trade's brokerage business had enough upside potential to counteract them.
Unfortunately, after Lehman's fall, E-Trade saw its mortgage portfolio slammed by a wave of defaults and delinquencies that its internal models failed to predict. "What I thought had been a crisis past was a crisis present," says Nolop. The mortgage losses were huge — ultimately larger than the company's precrisis equity.
As Nolop worked with then-CEO Donald Layton (who has since retired) to steer the company through a recapitalization and a return to its core online-trading business, they tried to convince banking regulators that their financial plans were sound. E-Trade hoped that those same regulators would offer some assurance of their own, in the form of TARP funds. "When TARP came out in late 2008," Nolop says, "we thought, 'Hallelujah, here is a source of inexpensive capital that can really help us get through this year.'"
The firm dutifully applied for assistance, submitting financial projections and capital plans. When the Office of Thrift Supervision called on a Friday evening asking for a new plan to be sent to Treasury by Monday morning, "we spent all weekend negotiating the terms and coming up with the new financial model," says Nolop.
After all that work, however, the silence from Treasury was deafening. "We were never turned down, but we were never accepted," Nolop says. "To this day we have never had any formal communication from the government saying that we would not get TARP, or an explanation of why."
So E-Trade embarked on what it called a "self-help" program. The firm recapitalized in the third quarter, completing a deal with shareholders to exchange $1.7 billion of its corporate debt for debentures that could be converted into stock. The debt exchange spawned a $968 million third-quarter pretax, noncash loss, but it also cut E-Trade's annual corporate interest payments from about $360 million to about $160 million and pushed out all maturities until 2013.
The company also raised $765 million in common stock, including a $147 million at-the-market offering (an offering of stock directly into the market at other than fixed prices). Nolop says that management knew the stock offerings would be enormously dilutive to existing shareholders, but it felt that if they were done right and put the problem behind the company, the value of the stock should start rising from that point forward. "The cost of dilution was offset by the reduction in the risk of bankruptcy," he says.
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