July 11, 2008

Officials Watching Wachovia: The Hope is That New CEO Will Keep 3 Operations Here

By Richard Craver, Winston-Salem Journal, N.C.

Jul. 11--The hiring of a North Carolinian as Wachovia Corp.'s chief executive gave local officials hope yesterday that the bank would remain committed to a large presence in Winston-Salem.

But Allen Joines, the mayor of Winston-Salem, said that officials plan to talk with Robert Steel, the new chief executive, "sooner than later" to stress the advantages of keeping three major operations and 3,000 employees here.

Steel was hired Wednesday night. Wachovia said in a regulatory filing that it will pay Steel an annual salary of $1.1 million, plus bonuses and other incentives that could total $38.1 million.

Steel, a native of Durham and a graduate of Duke University, succeeds Ken Thompson, who was ousted as chief executive June 1. Steel is a former undersecretary in the U.S. Treasury Department and a former executive at Goldman Sachs Group Inc.

The reason for local nervousness is that Thompson made a commitment to keep a work force of 3,000 in Winston-Salem -- Wachovia's hometown before it was moved to Charlotte after being bought by First Union Corp. in September 2001.

The merger cost about 1,300 local Wachovia jobs.

But Wachovia has its wealth-management division, its Carolinas banking unit and segments of its information-technology operations here. It sold its former headquarters, the Wachovia Center, to a real-estate investment trust for $39.6 million in September 2004. It is leasing space in the building.

"We're very pleased with the North Carolina connection to the new CEO," Joines said. "We believe he knows the heritage of banking and of Wachovia in our region.

"There's no indication that Wachovia is planning any changes. But it's incumbent on us to establish a relationship with Mr. Steel."

Steel addressed the concerns about a consolidating Wachovia during a press conference yesterday.

"Wachovia before me and after me has had, and will have, a great commitment to community and to the different aspects of all the communities we work in, not just Charlotte," Steel said. "Wachovia is a large company, and we need to have roots in all our communities."

However, Michael Mayo, an analyst with Deutsche Bank, wrote in a report that Steel, as an outside hire, is likely to push for reduced expenses.

"We like the idea that the hire is from outside the firm, so that there will be less sentiment when it comes to shedding noncore businesses, shrinking the balance sheet, and streamlining expenses (all of which are planned)," Mayo said.

Gayle Anderson, the president and chief executive of the Greater Winston-Salem Chamber of Commerce, said that local officials' goal will be to show Steel "that our cost of doing business and cost of living are significantly below other locations in North Carolina and throughout the Wachovia footprint."

According to a profile of Steel in The Charlotte Observer, Steel serves as chairman of Duke University's board of trustees. He headed the search committee that in 2003 selected university President Richard Brodhead, and he guided the board during trying times, including the 2006 lacrosse scandal.

Steel is skilled at mediating between big personalities, said Frank Emory of Charlotte, a trustee and a partner at Hunton & Williams law firm. Steel, married and a father of three daughters, is approachable and down-to-earth, trustees said.

"He is scary smart, very steady, good at picking out what's important, not afraid of taking the lead and taking the heat," Emory said.

Analysts said that Steel will need all of his leadership skills, and a quick study of retail banking from Wachovia executives, to turn the bank around from major financial struggles.

The latest blow came Wednesday when Wachovia said it had put aside $4.2 billion to cover defaulting loans. It also projected a second-quarter loss of between $2.6 billion and $2.8 billion, excluding a goodwill write-down.

Investors apparently focused more yesterday on the projected earnings loss than on the hiring of Steel. Wachovia's share price fell $1.16, or 8.1 percent, to close at $13.13. The shares have fallen about 75 percent from their 52-week high of $53.10 Sept. 19.

"It's going to get worse before it gets better," said Tony Plath, a finance professor at UNC Charlotte. "Still, it's the best piece of news that could come out regarding the CEO search.

"The board needed to act quickly, decisively and, most important, get the right person for the job. I think they've done all three, which means the paycheck Steel receives is really secondary if he's able to restore the credibility of the bank and get its business model moving forward."

But Richard Bove, an analyst at Ladenburg Thalmann & Co., said that Steel is not the right choice to run a struggling Wachovia.

"They have said that Steel's lack of retail banking experience doesn't matter, and I say it does because it's going to take years to get the stock back into the $40 to $50 range," Bove said.

Sebastian Hindman, an analyst with SNL Financial, said that the hiring of Steel is Wachovia's way of saying "it is entering a new era" and shelving the expansion thrust of its First Union heritage.

"It does come across to me that Wachovia wants to get back to doing its core business rather than just growing its revenue stream," Hindman said.

Mayo said that Wachovia is signaling its desire to stay independent with the hiring of Steel.

"The news is far from perfect," Mayo said. "We think a takeover is now extremely remote. There was no new capital raise announced or dividend cut, but this does not mean the new CEO will not take a look at these issues, thereby creating a degree of ongoing uncertainty.

"Leadership was needed, and now Wachovia has somebody who knows markets, management and understands the workings of Washington."

Richard Craver can be reached at 727-7376 or at [email protected]


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