Why Jack Welch Cracked Heads At KidderLeah Nathans Spiro
Maybe it was Joe Jett's revenge. Ever since the former Kidder, Peabody & Co. executive was fired last April for an allegedly fraudulent trading scheme, Kidder has been enmeshed in crippling rumors about its finances. Finally, on June 22, Jack Welch, General Electric Co.'s hard-bitten chief executive, moved to rescue the troubled GE unit. Welch summarily replaced Michael A. Carpenter, Kidder's embattled chief--just two months after pledging to support him. "When you create uncertainty, companies, institutions can unravel," Welch said at a press conference in New York. "So, our job today was to step forward."
In Carpenter's place, Welch brought in some of GE's most adept financial gunslingers. He named Dennis D. Dammerman, GE's chief financial officer and a Welch confidant, as Kidder's interim chief executive. Welch also installed Denis J. Nayden, an executive vice-president at GE Capital Services, GE's huge financial arm, as Kidder's president and chief operating officer. Once Dammerman has stabilized the situation, Welch said, Nayden will become CEO--probably in three to five months. "Dennis and I are neither as smart nor as rich as Warren Buffett, but we like to think we're doing the same thing," said Welch, in an attempt to inspire parallels with the billionaire investor's 1991 move into the top spot at then-troubled Salomon Inc.
To further quell doubts about Kidder, Welch painted a relatively rosy picture of the firm's finances. Kidder, he says, "has earned $275 million" after taxes since 1986--which Welch characterized as "neither a home run nor a disaster." And a major worry about Kidder is being taken care of, he said: Kidder recently has reduced its portfolio of mortgage-backed securities from $16 billion to $10 billion. Of that amount, Welch says, only $430 million worth is relatively illiquid inventory. And Welch estimated the firm's second-quarter losses at just $25 million to $30 million--a far cry from previous internal estimates that put the shortfall as high as $100 million.
The question now: Will rescuing Kidder eventually require a full takeover of the unit by GE? Some outsiders suspect that Welch's move is just the first step toward shifting control of Kidder to GE Capital Services. The unit's managers, including Nayden, have proven themselves experts at handling problem assets--from the troubled commercial real estate and leveraged buyout loans of the late 1980s to leased airplanes more recently. Indeed, GE Capital bought out hundreds of millions of dollars worth of junk bonds Kidder owned when the junk market cratered in 1990.
Whatever the plan, it seems certain that GE Capital will exercise more direct control over Kidder from now on. Although Kidder nominally always was a unit of GE Capital, Carpenter reported to Welch, bypassing Gary C. Wendt, GE Capital's control-minded CEO and Carpenter's political adversary. Nayden, however, is a protege of Wendt and will report to an executive committee that includes Wendt and Dammerman. The result: "Denis will work with Gary on synergies" between GE Capital and Kidder, says Les Lieberman, a former Kidder investment banker.
"OTHER SHOE." Kidder is not out of the financial woods yet. Because of its troubles, the firm spends more than its rivals do to finance its inventory of mortgage-backed securities. That business--a key moneymaker in the past--will be tested as Dammerman decides whether to shrink Kidder's highly leveraged balance sheet. At the very least, Dammerman and Nayden are likely to broaden Kidder's base to cut its dependence on the mortgage-backed business.
Welch certainly did not dispel uncertainty inside Kidder. Employees got the news from Welch and Carpenter at 12:45 on June 22 on the firm's internal communications system. Some were surprised that Welch acted before the release of Kidder's internal report on the Jett trading scheme, due out in mid-July. And the fate of Edward A. Cerullo, the head of the firm's fixed-income operation, is even more uncertain without Carpenter. "I'm waiting for the other shoe to drop," says one New York employee. But at least Welch has put to rest the most serious questions about Kidder's management.