The Mess At Bank One

Ex-CEO McCoy shared power too much

During most of the decade and a half when John B. McCoy strode around the Midwest snapping up more than 100 banks, he tried to give his acquisitions a long leash. The affable former small-town banker--the third-generation scion of a banking family--liked to keep local managements in place and let them stick with their own styles of doing business. Billing his approach the "uncommon partnership," he would tell bankers across Ohio and elsewhere that they were the reason he was buying their banks in the first place. He put off centralizing control as long as he could.

So in 1998, when he decided to pair up his Columbus (Ohio) outfit and First Chicago NBD Corp. to form Bank One Corp., McCoy didn't mind sharing power--something the First Chicago folks insisted on. From the top on down, he figured, Bank One would be a true merger of equals. As president and chief executive, McCoy would work cheek by jowl with ex-First Chicago chief Verne G. Istock, who would get the chairman's seat. The merged bank's board would include 11 members from McCoy's old BANC ONE--as it was originally styled--and 11 from First Chicago. He would even move his headquarters to Chicago, a fitting base for the $279 billion outfit, then the nation's fourth-largest bank. Even though BANC ONE shareholders would own 60% of the merged bank's stock, neither side would hog the driver's seat.

WARRING CAMPS. This friendly approach, it's now clear, was a road map for disaster. By sharing power, McCoy ultimately lost it, last December, abruptly ending his 30-year career with the bank that his grandfather had founded and his father had expanded and where he had become CEO in 1984. By proving unable to cement his control of the sprawling organization and its fractious board, McCoy set himself up as a target when knotty operating problems arose. The board split into warring camps. And he was overseeing an operational mess, with at least three technologically incompatible computer systems and disparate corporate cultures. "One institution's legs had to be broken and then sent merrily on their way," argues Annie L. Hall, a 17-year associate of McCoy, who in May will leave her post as director of government relations for Bank One. "But McCoy always took the position that rational adults would accept and adapt."

Bank One's new leader, ex-Citigroup President Jamie Dimon, named chairman and CEO on Mar. 27, is sorting through the wreckage. He faces thorny integration problems as he tries to knit together a sprawling 14-state retail bank operation and buff up a tarnished credit-card operation. He takes over a bank whose stock has lost half its value in two years. As Dimon combs through the operations, he might look back to see just what went awry.

More inclined to schmooze with customers on a golf course than pore over numbers or maneuver through a snake pit of managerial and board politics, McCoy, who holds an MBA from Stanford University and an undergraduate degree in history from Williams College, did not see the fatal challenges until too late. He seemed taken by surprise by earnings setbacks at units that had warned him of problems. And even BANC ONE-side veterans complain that he failed to listen when problems were brought to him. In the end, say longtime friends, he had neither the heart nor the grit to oversee the banking empire he built. "He doesn't have the killer instinct," says a family friend. "He was enormously naive, and he got caught."

FOLKSY STYLE. For his part, McCoy believes the deal would have paid off if it weren't for setbacks at the once stellar credit-card unit. If there hadn't been an earnings shortfall at the First USA operation, McCoy's folksy, decentralized management style would have been readily adopted at the bank, he argues. But that one major reversal--for which he takes responsibility--"allowed all the coming together to fall apart," McCoy has told associates. "It just allowed a wound that was being closed to open up again and become divisive."

But even at the outset, some longtime observers were troubled by McCoy's reluctance to take a firm grip on the reins. Credit Suisse First Boston analyst Michael L. Mayo issued a post-announcement report, in which he expressed doubts about whether Bank One "will move fast enough to make needed changes, given a Chicago-based headquarters, a split board, and the presence of First Chicago's CEO, who remains as chairman and was quite visible during the merger presentation."

But McCoy admitted to senior executives in Chicago that he was wrestling with problems he had never encountered back home. In fact, in one controversial move, McCoy tried to scrap a useful First Chicago NBD tradition: a regular Monday-morning meeting of the 12 to 15 top executives. Without that, complained one veteran, neither McCoy nor others could grasp issues the bank routinely faced. "In a large complex global organization, the issues are not trivial," the veteran says.

McCoy, who preferred to be on the road with staff and customers three days out of every five, had little use for the First Chicago approach. "If they were so frigging good, why did they put themselves up for sale?" asks a source close to McCoy. "That's so much B.S." First Chicago hadn't increased its revenues in two years. If he had had time to put in new approaches--probably decentralized ones run by go-getter managers driven to lead in their fields--the bank could have thrived, the ex-CEO argues. He wasn't given the chance.

NO ALLIES? Still, McCoy sowed many of the seeds of his own undoing. Soon after the merger announcement, he moved his office to Chicago but left several of the major business chiefs in Columbus or in Wilmington, Del., the operational headquarters for First USA. By surrounding himself in what friends call "hostile territory" with First Chicago NBD managers, McCoy lost the ready counsel of longtime associates. For their part, McCoy partisans say that he plunged himself into a highly political environment where he found few allies. The charge is hotly denied by First Chicago NBD veterans. Argues one former executive: "We all tried everything possible to help John. He wouldn't listen."

Within just a few months of the merger's completion in October, 1998, problems at First USA surfaced. The autonomous credit-card giant had accounted for up to one-third of the old BANC ONE's earnings. But now customers were cutting up their First USA cards, infuriated by such practices as quick jumps in teaser rates from 3.9% to 9.9% a year, and by even stiffer punitive rates: Miss a payment date twice in six months, for instance, and the rate soared to 19%. In the cutthroat credit-card world at the time, such customers could easily dump First USA and find alternative cards. And First USA, trying to save cash to boost returns, wasn't signing up enough new customers to replace the dropouts.

Insiders at First USA say the problems stemmed from unrealistic performance expectations imposed on them by McCoy and Istock. They were able to earn an industry-pacing 2.91% return on assets in 1998, for instance, but couldn't see any way to hike that to an asked-for 3.25% return on $70 billion in expected credit-card loans outstanding in 1999. And yet, they argue, neither McCoy nor other senior executives would pay attention when they warned that a shortfall would have to come.

For his part, McCoy maintains that First USA could have done better but that its managers slipped up by upping the costs for consumers and thus alienating them. Other card companies, he says, managed to keep growing briskly, but First USA's leaders made poor decisions that curbed its growth.

In any event, when the profitability problems started appearing in April, 1999, McCoy waited four months to acknowledge them publicly. So when he announced on Aug. 24 that earnings would fall short of expectations, the market reacted brutally. Bank One's stock plunged more than 23%, to 43.

As the crisis hit, McCoy only worsened matters for himself. He and another director headed off on a long-scheduled European vacation. Then, McCoy followed that in mid-September with a golf outing to Dallas for the Senior PGA Tour, which Bank One sponsored. McCoy is a passionate golfer with a 10 handicap, but bank veterans grouse that it was hardly the right time for him to indulge in his hobby. "A good banker goes to where the emergency is, hunkers down, and goes to work," says Donald P. Jacobs, dean of the J.L. Kellogg Graduate School of Management at Northwestern University and a former First Chicago NBD director. McCoy says he was in constant communication with the headquarters during his five-day European trip and the couple of days he was golfing with customers, and he believed he had executives he could rely on back in Chicago.

DEFECTIONS. The bank's problems came to a head in October. Several key executives close to McCoy quit, notably former BANC ONE Chief Operating Officer Richard J. Lehmann, who as vice-chairman at Bank One was one of the dwindling number of McCoy supporters on the board. McCoy also had lost the bank's other vice-chairman, David J. Vitale, a First Chicago veteran who had overseen the investment-banking and capital-markets area. And he also lost Richard W. Vague, the First USA founder and longtime credit-card unit head with whom McCoy had worked for nearly three years.

Increasingly isolated, McCoy narrowed his focus to the credit-card operation. McCoy and Istock swapped jobs. McCoy took the chairman's title from Istock, while keeping the CEO's post, but lost most of his operating responsibilities. Even though the shift was announced along with a 12% decline in third-quarter net income, it triggered a short-lived rally that took Bank One stock from about 33 a share to just over 39 in early November.

Ever the optimist, McCoy sought to put a good face on the setbacks. He argued that First USA was still a "key competitive" operation for the bank. Marketing, pricing, and customer-service issues, he said, had only "temporarily slowed" the unit's momentum. He promised that he would have plenty to say in an analyst meeting less than four weeks later.

But the mid-November analyst meeting was not to be. Instead, just five days beforehand, the bank canceled the session. Earnings for the full year, it cautioned, would likely come in still lower than expected, chiefly because of "softness" at First USA. Conditions were even worse than expected at the card unit, McCoy admitted. First USA in fact had lost millions of customers--although bank officials even now refuse to say just how many--cutting it back to 56 million customers and shrinking its total card loans outstanding by 1%, to $69.4 billion, by yearend.

By now, the split on the bank's board of directors was widening. "The two factions did fight," says a former director. "It was warfare." Directors loyal to McCoy, many of whom had worked with him and his father for years, believed he could fix First USA and pull the bank out of its problems. But First Chicago loyalists such as James S. Crown, a director whose 9 million shares have been hit hard by the market slide, understandably wanted a dramatic change, according to analyst Mayo. Crown did not return calls for comment.

Under pressure more intense than he had ever seen in Columbus, McCoy decided in November to throw in the towel. From then on, he was working with the board to find a graceful exit that would make way for an outsider. A source close to the ex-CEO recalls McCoy saying: "I said [to my wife], `Get me out of this trap,"' he recalls. "`This is not fun. I don't like playing these games.' There were a lot of frigging games going on. I'm not a politician."

The CEO quit, without public comment, on Dec. 21 at age 56. He was four years shy of his planned retirement age but now admits he's relieved to have the bank's problems off his shoulders. Now that Dimon has been named, McCoy says, "I'm satisfied that, given the issues we have, that we have found absolutely the best solution." Certainly, he has no financial worries: Loyalist directors fought for him to get a severance package that included a $10.3 million cash payment in January, 2000, on top of a total of $7.5 million in "special recognition awards" for 1997 and 1998, and $3 million a year in pension payments beginning in 2001. With 1.87 million shares, McCoy also remains a major Bank One shareholder.

When McCoy quit, the bank was plunged into uncertainty. For nearly three months, Istock took over as acting CEO, while outside director and longtime McCoy colleague, John R. Hall, led a CEO search and filled the chairman's job. And the news that Istock had in store for investors got still gloomier: Earnings would be lower than expected this year, he admitted in January, as the return on outstanding credit-card loans would slide to a dismal 1%, down from 2.4% in 1999 and from the blistering 2.91% pace of 1998. Indeed, profitability at the credit-card unit may not recover until next year.

In first-quarter results, announced on Apr. 18, the unit's return slipped to 0.6% on sharply reduced assets of $67.1 billion. Stunningly, First USA contributed just $70 million in net income, down from $303 million in last year's opening quarter. Overall, Bank One earned just $689 million in the quarter, down from $1.15 billion last year.

But all of that is someone else's problem now. New CEO Dimon is laboring to restore stability, insisting Bank One is not for sale. Bank executives admit it will take at least a year to get First USA back on a growth track and to restore earnings momentum to Bank One generally. It may also take Dimon at least that long to unite the contentious board behind him--if he is able to--and to put McCoy's legacy in the past.

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