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Leader’s Dilemna: Take it or take it!

Banks (Bloomberg)

A dilemma (Greek δί-λημμα “double proposition”) is a problem offering at least two solutions or possibilities, of which none are practically acceptable. (Wikipedia)

Imagine that you are the leader of a major American financial institution and you’ve been summoned to a meeting hosted  by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke.  You are joined by nine other Masters of the Universe bankers and according to a report by Mark Lander and Eric Dash with Louise Story and Ben White in the New York (Drama Behind A $250 Billion Banking Deal):

The executives did not have an inkling of Mr. Paulson’s plans. Some speculated that he would brief them about the government’s latest bailout program, or perhaps sound them out about a voluntary initiative. No one expected him to present his plan as an ultimatum.

Editor’s observation: Considering what has transpired over the past few weeks, it seems a bit limiting to not to have anticipated a scenario that presented this type of “offer.”

You sit there as the Treasury Secretary and Fed Chairman lay out their plan to “buy” stakes in your institution and depending on your perspective (and balance sheet) this might not be too bad. But other Masters of the Universe bankers have different ideas; not everybody sees the same future.

Mr. Kovacevich of Wells Fargo objected that his bank, based in San Francisco, had avoided the mortgage-related woes of its Wall Street rivals. He said the investment could come at the expense of his shareholders.

Mr. Kovacevich is also said to have expressed concern about restrictions on executive compensation at banks that receive capital injections. If he steps down from Wells Fargo after completing a planned takeover of Wachovia, he would be entitled to retirement benefits worth about $43 million, and $140 million in accumulated stock and options, according to James F. Reda & Associates, a executive pay consulting firm. Pay experts say the new Treasury limits would probably not affect his exit package.

Kenneth D. Lewis, the chairman of Bank of America, also pushed back, saying his bank had just raised $10 billion on its own. Later, Mr. Lewis urged his colleagues not to quibble with the plan’s restrictions on executive compensation for the top executives. These include a ban on the payment of golden parachutes, repayment of any bonus based on earnings that prove to be inaccurate, and a limit of $500,000 on the tax deductibility of salaries.

If we let executive compensation block this, “we are out of our minds,” he said, according to a person briefed on the meeting.

The “meeting planners” reserved the room long into the evening but surprising everyone went home at 6:30 PM.

But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.

Now for some questions.

Peer pressure, self interest or for the good of the country?

What would have been going through your mind as the plan unfolded? How would you have reacted?

Did Paulson and Bernanke have a choice? Did the bankers have choice?

Required reading:

Drama Behind A $250 Billion Banking Deal (NY Times – October 15, 2008)

At Moment of Truth, US Forced Big Bankers to Blink (Wall Street Journal – October 15, 2008 – subscription required although free access through Google search) IN case you don’t have time to read these great articles here’s a summary by Wall Street Journal reporter Deborah Solomon:

Photographers for montage at top: Kim White (Wells Fargo), Adam Rountree (Bank of New York), Daniel Acker (Goldman Sachs), Jin Lee (Citibank), Tom Starkweather (Bank of America), Chris Ratcliffe (Merrill Lynch), JB Reed (Morgan Stanley and JPMorgan), and Mike Mergen (State Street)/Bloomberg News (BLOOMBERG NEWS)

About the author

Peter A. Mello, Founder/Editor Founder of Weekly Leader and Sea-Fever Consulting, LLC, a leadership development and strategic communications consultancy. Previously, CEO of an international nonprofit organization and COO of a national insurance/risk management services firm. Peter has been leading people and managing organizations for over 30 years, writes a leadership column for MarineNews magazine and blogs about maritime culture at Sea-Fever. Follow him on Twitter.

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