Leadership and the Global Financial Crisis
The 2007-08 global financial crisis started with collapse of the housing market in the US and led to an economic decline across the world. The crisis spurred from trillions of dollar worth of risky credit going bad due to lax financial policymaking by the government bodies, risky lending practices of the private banks and failure of the watchdog institutions. It was a test of resilience and crisis management for corporate and political leaders from across the world and it required urgent course correction in an uncertain environment with high stakes.
The political and corporate leaders of the world were faced with two main challenges as this crisis unfolded: i) sustaining their company or country’s economy, and ii) keeping it functional till the economy recovered. This paper will evaluate the leadership styles of 2 corporate leaders and 2 public leaders in the events leading up to the global financial meltdown, their response to the crisis and how they managed their respective organizations.
Jimmy Cayne, ex-CEO, Bear Stearns
James ‘Jimmy’ Cayne started his career as a scrap iron salesman. He joined Bear in 1969 and rose through the ranks of the brokerage division. In 1993, he became the CEO of Bear Sterns by replacing Mr. Alan Greenberg, the then longtime CEO of the company. The organization consisted of men (and a handful of women) who cared about making money, had zero regard for pedigree or what people thought of them.
In 2007, two of Bear’s hedge funds composed of subprime mortgages collapsed leading to mounting losses for investors. The company further increased its exposure to mortgage backed assets which eventually led to its collapse and sale to JP Morgan in 2008. During the most critical days of crisis, Mr. Jimmy Cayne was nowhere near his company’s headquarters in Manhattan. An avid bridge player, he was participating in a bridge tournament in Tennessee and had turned off his cellphone and email devices. According to a WSJ article(endnotes), he typically spent 10 out of 21 workdays in a month out of office, either playing bridge or golf where he did not entertain any business. Bear Sterns had in the past had weekly meetings to spot any challenges with specific trades and Mr. Cayne usually had spotty attendance on those meetings.
Between 1993 and 2007, Mr. Cayne was regarded as a person who turned around the firm. He was credited with developing talent and had a consensus-based approach to management. However, over the course of time his consensus-based management approach turned into managing the company in absentia. Even when the crisis was unfolding Mr. Cayne was repeatedly out on the golf course or at bridge tournaments. He again put a disappearing act in August when Bear held an emergency Friday call to discuss the subprime and its two hedge funds failure. Eventually he was replaced and had to sell his stock after his firm took a write down of $1bn.
Mr. Cayne’s leadership style was characterized by arrogance and complete disregard for shareholders and colleagues. His hands-off management style made him miss critical events that preceded the crisis. His continued absence also sent worrying signals to analysts and investors that brought down the price of the already falling stock. Some strategists would argue that good leadership involves a high amount of delegation. However, his actions did not inspire confidence amongst the employees of the organization. He did have the pressures to deal with Wall Street investors, nervous staff and uncertainness of future that came in the wake failed mortgages market, however, working closely with employees could have helped him minimize the impact of the crisis on Bear.
Timothy Geithner, ex-President, Federal Reserve Bank of New York
Tim Geithner was the head of the Federal Reserve Bank of New York at the time of the 2008 crisis. In his role, he oversaw the allocation of $350 billion worth of funds as part of the Troubled Asset Relief Program (TARP) to the bailouts AIG, Bear Stearns, Citigroup, Freddie Mac and Fannie Mae.
In his media and public interactions leading up to the crisis, he did raise concerns about weaknesses in financial clearing systems and no central agency for regulating derivatives. However, most of those interactions concluded with suggestions that the financial system was stable and stronger than ever. He did not actively advocate for improvements in regulations. In his response to the crisis, Mr. Geithner proposed that TARP bailouts for the big banks was the best possible alternative for the economy in crisis. However, he did not provide any justifications for this decision to the general public. In an interview with NPR, he stated that he did not have much choice in how to respond to the crisis. He went on to admit that he failed to communicate with the public because his actions to save the economy looked like he was rewarding the very bankers who had caused this crisis. His decisions did ignore the rights of the borrowers. For example, the Treasury Department decided to not pass the legislation that allowed the borrowers to use bankruptcy courts to reduce principles on their home loans. This would have had zero cost to the taxpayers. Mr. Geithner defended his actions in his book ‘Stress Test: Reflections of Financial Crises’ and said that providing TARP bailouts was the only way to prevent massive levels of unemployment and a multifaceted crisis from happening.
Mr. Geithner has received mixed reviews on his actions. He is the darling of the very banks he helped rescue but has been widely criticized by public and economic leaders regarding his motives, judgement and competency. However, to his credit all the options that Mr. Geithner had were bad. Some critics believed he should not have let Lehman fail, some said letting the banks go down would have been best. However, Mr. Geithner’s hands-on leadership style which involved having a plan and making hard decisions helped him steer the country through tough times. Yet again, in the post crisis world he never advocated for strong reform on Wall Street. He did not advocate for Glass-Stegall type of reforms that would impose clear boundaries for banks. His activities were limited to condemning the Wall Street banks on giving out huge bonuses one year after Lehman’s collapse. His leadership style during the crisis did question his ethical and moral standing especially in the light of non-communication with the general public at the time of crisis. He would have been able to gain trust of the people had he been more transparent with his reasoning behind the bailouts.
Jamie Dimon, CEO, JP Morgan
After graduating from the Harvard Business School, Mr. Dimon joined his mentor Sandy Weil to work at American Express (AmEx). Later he moved with him to build Citigroup after leaving from AmEx. He was famously fired from his Citigroup role in 1998 after a fallout with his mentor. In 2004 he joined JPM, became its CEO in 2005 and led the bank through the crisis years.
His greatest success in his role as a CEO has been leading JPM through troubled times while and helping it survive the subprime bullet. At the height of the credit bubble, Mr. Dimon and his team showed daring leadership abilities by exiting the business of securitizing subprime mortgages and denouncing related instruments. His foresight and strong financial discipline allowed JPM to repay the TARP bailout as early as June 2009. He, in fact, claimed that JPM never needed a bailout. During the crisis, JPM acquired Bear Sterns and Washington Mutual, the two troubled banks.
Mr. Dimon’s leadership abilities are strongly rooted in his long-term investing style and his firm fiscal and risk disciplines. JPM performs more than 100 stress tests every week to measure the impact on their investments from wars, geopolitical disasters and recessions. Being prepared for the worst possible situation, lets Mr. Dimon run a tight ship which can withstand any crisis situations. He also fosters a culture of ‘owning up to mistakes.’ This culture helped him win trust of his executives during the crisis as he led them through it.
Lastly during the crisis and in his role as CEO, he has always maintained active communication with his employees and shareholders by using medium such as LinkedIn. In one such LinkedIn post, he says “I believe in EQ which includes empathy, clarity of thought, compassion and strength of character – qualities that are hallmark of a good leader.” He seems to believe strongly in the above and continues to embody the qualities as he gets ready for yet another 5-year CEO stint with JPM.
Gordon Brown, Prime Minister of UK (2007-2010)
The international impact of the financial crisis in the US was felt soon after the collapse of Lehman. London, Frankfurt and Japanese stock markets were down by 20-25% and October 10th, 2008 was declared as “Black Friday”. In London specifically, people were trying to withdraw their deposits even at the payment of significant withdrawal penalties. As these events were unfolding, Mr. Brown stepped up with a plan to bailout UK banks. This plan became the template for resolving the crisis in the Europe and the US.
Mr. Brown had spent the first year of his Prime Ministership under the shadow of Mr. Tony Blair’s charismatic leadership. He election manifesto had promised good governance, humility and hard work for his voters. He had sold his candidature on the strength of his character, stressing the importance of integrity and of treating people fairly and decently. And he was able to showcase this strength at the time of the crisis. Not only was he able to think and communicate clearly with his constituents and his counterparts of countries hit by crisis, he also showed a strong bias for action. By Friday evening, the RBS and HBOS, two major banks of the UK had run out of cash and it could have led to a complete shut down of the economy if Mr. Brown didn’t actively propose the recapitalization of banks. In this process, he ensured that existing public shareholders of RBS and HBOS would be diluted far less after the government obtained majority stake in them. Mr. Brown also chose a great person to lead the national Exchequer, Mr. Alistair Darling. Both these leaders had very different personalities and did not see eye to eye on multiple matters. However, having a someone able to voice opinion different to his, Mr. Brown was able to evaluate the pros and cons of his decisions in a more detailed manner and implement the right solutions for his people. Before the crisis, Mr. Brown’s leadership was marred by political and public pressures of performing well. After the crisis, his image underwent a significant positive change however the country’s all-time national debt and unemployment rates did not help in sustaining his high ratings. However, a combination of good timing, great team and his ability to act quickly helped him emerge as a great leader during the crisis.