In retrospect, agreeing to the creation of CMART, allowing it and the Chase Real Estate Department to fall victim to overly aggressive and poorly supervised lending policies, and christening it with the Chase name clearly constituted the worst decisions I made during my tenure as chairman.
A DISASTROUS BOARD MEETING
The problems we experienced with CMART and our own real estate lending were not unique to us. Most banks were overextended and had bad loans, but because Chase was bigger, the consequences of our mistakes were bigger, too. In the three years between 1971 and the end of 1974, Chase and its subsidiaries had increased their real estate lending from $2 billion to $5 billion. The full dimensions of the disaster we faced crystallized in a single event: the Chase board meeting on July 16, 1975. That board meeting is engraved on my memory because it almost cost me my job.
Once a month the Chase board gathered in the executive dining room on the top floor of One Chase Plaza for lunch and informal discussions. On one wall of the dining room hung a large mural by the Italian artist Campigli, originally commissioned for the Andrea Doria, the ocean liner that had gone down in a spectacular ocean disaster. It was an alarming portent.
After lunch the directors assembled in the wood-paneled boardroom forty-three floors below. Reviewing the antiseptic formal minutes today, it is hard to believe the afternoon was such a nightmare. Only two sentences referred to the REIT: “A review was made of a proposed workout plan for Chase Manhattan Mortgage and Realty Trust and related resolutions. After discussion, it was decided to defer action to a special meeting of the Board of Directors which would be called by the Chairman.”
The reality had been much more dramatic.
After taking care of routine business I called for an update on Chase’s obligations to CMART. A competent lending officer with little real estate experience, who had been assigned to head the Real Estate Department when Ray O’Keefe left to run CMART in 1973, stepped to the podium. It soon became apparent that the disaster he inherited had become too much for him. His presentation was inarticulate and confused. When board members pressed him to clarify certain points, he was almost incoherent, and the board became even more confused and agitated. Recognizing the magnitude of the disaster that was unfolding before me, I interrupted the disjointed and dispiriting presentation and proposed that the discussion be postponed until a more thorough analysis of CMART could be prepared for a special board meeting I would convene the following week.
I had no illusions about where I stood with the directors. The presentation had unnerved them because of what it intimated about the bank’s position and my management. They knew CMART was in deep trouble, but they expected top management to have a plan for dealing with the deteriorating situation. The scene they had just witnessed was far from reassuring.
I scheduled the special board meeting for the following Thursday, July 24.
The next day Dick Dilworth flew up with me in the Chase helicopter to Hudson Pines for dinner. This was the first opportunity I had to discuss with him the prior day’s meeting. Dick told me that he had been sounding out other board members during the day. As we flew past the Cloisters and out over the Hudson, he told me that he had found considerable concern about my leadership of the bank. He said a few directors were quite outspoken in their criticism of me—John Swearingen, chairman of Amoco, and Fred Lazarus, chairman of Federated Department Stores, prominent among them. Neither of them had been supportive of me, so I was not surprised by their reactions. I was more concerned that Richard Shinn, chairman of Metropolitan Life, whom I considered a friend and supporter, had also been critical.
Dick phrased his words as constructively as he could, but there was no doubt what he was telling me. Though one of my principal backers on the board, he never lost sight of his own responsibilities as a director. By the time we reached the Tappan Zee Bridge, Dick had warned me that the special board meeting was a make-or-break occasion for me as chairman.
I had less than a week, literally, “to get my act together.”
PREPARING FOR ARMAGEDDON
If I was going to convince the directors that I was on top of the situation, I had to be on top of the situation. That meant preparing a detailed, objective analysis of the full extent of our liabilities—no rosy scenarios. There had been far too much wishful thinking. We had to assume the worst and demonstrate exactly what we would do to control the damage.
As a first step I immediately restructured the line of command in the Real Estate Department and put together a small working group to crunch the numbers and propose alternatives. John Haley, the executive vice president whose responsibilities included real estate, headed the group with able assistance from Richard J. Boyle, a senior vice president who was barely thirty years old. Dick had come to my attention a few years earlier through his work at Detroit’s Bank of the Commonwealth, with which we had huge outstanding loans. When that venerable institution reached the verge of bankruptcy in 1970, we seconded John Hooper, one of our executive vice presidents, to serve as chairman and CEO to straighten out their problems. Hooper had included Boyle on his team, and I had been impressed by his excellent analytical skills and capacity for hard work.
After working around the clock for days, the CMART task force determined that Chase had about four times the value of its equity capital exposed in real estate. We had $827 million in loans to REITs, of which $141 million represented loans to CMART. The analysis also showed that CMART’s failure would lead its creditors to demand that Chase’s loan be subordinated to theirs, meaning that our loan would be wiped out completely. Our CMART liabilities alone represented one-tenth of Chase’s equity.
The costs of lawsuits and claims by creditors against the bank and the REIT could cause an overall loss of confidence in the bank and lead to a sharp decline in the value of our stock. Thus, the worst case was that Chase might go under or be so badly crippled that it would never be a viable institution again. That wasn’t a likely scenario, but it was a possibility—a very anxiety-provoking one for the board and a deadly serious one for me as Chase’s CEO and as its largest shareholder.
Their dismal analysis confirmed my worst fears, but I decided to present the complete picture in all its painful detail to the board and accept the consequences, whatever they might be.
DAY OF RECKONING
It was a very somber group that filed into the meeting room at 410 Park Avenue, Chase’s midtown Manhattan headquarters, on the afternoon of July 24. Almost every board member—many from distant parts of the country and most of them CEOs of major corporations—was in attendance. Concern was etched into their faces, and I noticed that some of them were quite guarded, as if they had already decided my fate and now wanted to distance themselves from me. Their attitude of skeptical watchfulness added to my own discomfort and sense of foreboding.
Up to that point the day had not gone well. An early-morning meeting at Gracie Mansion with Mayor Abraham Beame had been disastrous. Beame still refused to accept the severity of the City’s deepening fiscal crisis or to take any significant steps to resolve it. When I reached Chase, there was more discouraging news. Bill Butcher told me that our auditors, Peat, Marwick and Mitchell, had just informed him that the valuation procedures we wanted to use would have to be scrapped. As a result, for the most important meeting of my life, we would have to discard our carefully crafted presentation, complete with booklets filled with multicolored pie charts and fancy overhead visuals, and improvise. I kept thinking about the Andrea Doria!
John Haley started the meeting by summarizing the bank’s real estate lending history, including our loans to REITs, and outlining Chase’s current position. Dick Boyle then described in stark terms precisely what our current position was. Forty-six percent of CMART’s assets were nonperforming, and we were in the midst of negotiations with CMART’s forty other creditor banks, the trustees of CMART, and numerous outside lawyers. The creditor banks and the trustees of CMART wanted Chase to subordinate its CMART notes and
agree to several other onerous conditions that were totally unacceptable, but those were the demands we faced.
Boyle then presented our workout strategy. Standing at a blackboard with chalk in hand, Dick took the board through the process. We would purchase $210 million worth of loans from CMART, extend $34 million in new credit for buildings not yet completed, and, along with the other creditors, reduce the interest we were charging CMART to well below market rates. Chase would not be permitted to select only the good loans—many of those we would acquire would not be of high quality—but at least we would reduce our exposure to manageable proportions. Boyle estimated that losses in the first two years could amount to $100 million.
Dick cautioned that CMART was still in a precarious position and that our workout plan was no guarantee of its future viability. If the market got worse, Chase might be required to provide even greater financial assistance to CMART. But without the workout, CMART would have to file immediately for bankruptcy, and Chase would be involved in expensive and protracted litigation from everyone involved. The bankruptcy of CMART could lead to the bankruptcies of other REITs, leading to still greater losses in Chase’s own portfolio. The adverse impact of a bankruptcy on Chase’s reputation and its ability to attract funds was incalculable and had to be avoided categorically.
After Boyle’s presentation, board members asked a number of questions, but there was a great sense of relief in the room, not because the proposal he presented was optimistic—even the best case meant real pain for the bank—but because the directors finally understood the true parameters of the problem. More important, they now believed that management had the situation under control, at least the part of it we could control.
After the meeting Dick Dilworth told me the mood of the directors had changed. “The sense I get,” he said to me, “is that they are considerably happier than they were last week; but they’re waiting to see. I’d say you have about a year to turn things around.” That was a relief, but we still faced a big challenge.
Despite our best efforts, CMART did default on its obligations and filed for bankruptcy in 1979. From 1975 to 1979 the bank charged off $600 million in real estate loans, and the total cost, including the loss of income from nonperforming assets, was almost $1 billion. While CMART had been a bitter lesson, we had managed the bailout process in an orderly manner and mitigated the impact of its final failure. Fortunately, the income that we generated from other sources, especially from our international loans and operations during this same period, enabled us to cover the heavy losses we had sustained, and Chase never suffered an operating loss during that period. It had been a difficult, painful, and expensive experience for Chase.
ONE FINAL INDIGNITY
The only time I ever threw a reporter—or anyone else for that matter—out of my office was in January 1976, shortly after I had sat down for an interview with a reporter from The Washington Post.
The reporter, Ron Kessler, had asked to see me, ostensibly to review world banking trends. Shortly after we began, however, Kessler pulled from his briefcase a confidential report from the Comptroller of the Currency. The report was the same one we had received eighteen months earlier that detailed our many operational deficiencies in 1974. I was shocked that the Post had obtained this privileged information, and even more dismayed when Kessler displayed a confidential Federal Reserve memorandum that listed Chase as one of a number of big banks on the Comptroller’s “Problem Bank List.” I told him that I refused to discuss confidential government documents and asked him to leave.
On Monday, January 12, the front page of The Washington Post carried an eight-column headline: “Citibank, Chase Manhattan on U.S. ‘Problem’ List.” The story cited our abbreviated interview, quoting me as refusing to “discuss the examiners’ findings, saying their reports are ‘privileged.’ ” It added that while the examiners rated Citibank’s future prospects “excellent,” Chase’s prospects were listed as only “fair.”
It is true that the Comptroller’s report had characterized operating conditions at Chase as “horrendous” and that it had specifically noted “a large volume of clerical errors in certain accounts,” poor internal controls and audit procedures, and insufficient staff and inexperienced personnel in vital positions. However, when we received this report in August 1974, we immediately addressed the issues that it raised, and by the time of the Post’s revelations, we had largely corrected them. In fact, the Comptroller’s 1975 report had readily acknowledged this fact, as would their 1976 annual audit. So the breathless Post article on January 12, 1976, was largely based on very old news.
Because the Post story sent shock waves through the financial community, Comptroller of the Currency James E. Smith immediately issued a statement that both Citibank and Chase “continue to be among the soundest banking institutions in the world.” I issued my own statement that Chase was “sound, vital, and profitable” and that the article was based on information which was more than eighteen months old.
Even then Kessler and the Post refused to back off. In fact, this was only the first in a weeklong series of articles, including one in which Kessler cited for the first time a Federal Reserve Board memorandum that criticized Chase’s operations. Kessler’s use of this confidential document was particularly outrageous because its author had simply quoted from the Comptroller’s earlier report, although Kessler made it appear that these were entirely new criticisms of Chase.
As soon as I read the article, I called Arthur Burns, the chairman of the Federal Reserve Board, urging him to consider making a public statement in light of the damage the Post’s misleading stories were having on Chase and the American banking system. Burns agreed, and the following day The New York Times carried his statement that read in part: “In the year and a half since July 1974, the Chase Manhattan Bank has taken numerous steps to improve all aspects of the Bank’s operations that were criticized. As a result of these efforts, significant improvements in the Bank’s operations have been realized. . . . It is my judgment that the Chase Manhattan Bank is a responsibly managed and financially sound institution.”
Nevertheless, the damage had been done. Frankly, there was little we could say to challenge the story. Virtually every national newspaper and magazine picked up the Post “exclusive” and discussed the “nation’s banking crisis,” with Chase as the centerpiece.
At the height of this furor I received a vote of confidence from one of the directors. At the January 1976 Chase board meeting, the bank’s outside directors requested that all the “inside” directors leave the room except me. I thought initially of Dick Dilworth’s warning to me six months earlier. My anxiety quickly dissipated when John Connor, chairman of Allied Chemical Corporation, read the following statement and asked for it to be incorporated in the minutes: “In my opinion, the Bank and Corporation have a very strong top management team with David Rockefeller as Chairman and Bill Butcher as President. . . . As for the media criticisms, we all know that the problems described are about two years old. Starting at that time, the outside Directors expressed concern to the Chairman. . . . Management proved to be very responsive to the suggestions made, and as a result the Chairman and President carried out a new program that has resulted in a greatly strengthened organizational situation and sound loan programs and operating procedures.”
As to the public’s perception of Chase, the only way we could dispel the negative publicity and silence the critics was to perform, and that Bill and I were determined to do.
THREE-YEAR DEADLINE
By the middle of 1977 we had gone a long way in correcting our operational problems, integrating our new computer systems, and working out our real estate mess. Bill Butcher and I had righted the ship, but valuable time had been lost, especially in comparison with our major competitors, who had substantially increased their earnings between 1974 and 1976. During that same period, Chase’s net income had fallen by more than 40 percent. We had to improve our profitability and performance for our sha
reholders.
I had three years left before reaching the mandatory retirement age of sixty-five, and I wanted to go out a winner. Not only was I committed to turning the bank around but I was confident we could do it. For one thing the disasters of the mid-1970s gave Bill Butcher and me the opportunity to transform the Chase culture that had contributed substantially to our many difficulties. We reorganized the bank along more efficient, functional lines and also recruited seasoned outside specialists to head the critical areas of human resources, planning, corporate communications, and systems.
Two former General Electric executives played an instrumental role in this process of change and modernization. Alan Lafley, an experienced human resources executive, overhauled our recruitment, training, and compensation policies, and helped strengthen our internal communications at all levels. Alan also helped identify individuals to handle the other key non-credit-related areas of the bank. Gerald Weiss, a brilliant strategist, retooled a planning process that had been inept and ineffective. Their combined impact was just what I had hoped, and it went a long way toward making Chase the kind of professionally managed organization I had always felt it should be.
As a sign of our confidence in what we were doing, in 1977, we allowed Fortune magazine to write a story about the bank based on interviews with all of our top managers. Carol Loomis, one of the country’s most respected financial journalists, wrote the story. Her article, while not complimentary, was a fair and evenhanded appraisal of Chase’s situation. She wrote, “In one sense, Rockefeller has succeeded splendidly; he is a world-renowned figure, clearly this nation’s leading business statesman. Yet in another sense, Rockefeller must be judged at this point to have flunked.”
Memoirs Page 41