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Ask the Expert (in a crisis): How to Lead a Bank Through a Crisis

 

May 14, 2020

Max Simkoff: Welcome to Ask the Expert (in a crisis), our webinar series where we’re asking industry leaders about their unique perspective on how to navigate the most difficult challenges faced by the broader real estate and financial services ecosystem during the current global health crisis. These also give you a chance to ask the experts some of the most pressing questions on your mind.

My name is Max Simkoff, I’m the CEO of States Title. And today, I’m very excited to welcome John Kanas. John is the Vice Chairman of the Carlyle Group, previous CEO of North Fork Bank, and most recently the former CEO and Chairman of BankUnited, a business that he rescued from near bankruptcy in 2009 and ended up taking public just two years later. John is joining me today to talk about the topic, how to lead a bank through a crisis. 

John, welcome. 

John Kanas: Thank you, Max.

Max Simkoff: Thanks for being here. I wanted to start right out on the topic of seizing opportunities in the midst of market turbulence – something you’re no stranger to, certainly – in 2008 during the great financial crisis, you decided to join with a group of investors to buy a nearly bankrupt regional lender called BankUnited. And as I recall the story, when you found out from then Chair of the FDIC, Sheila Barr, that your bid had been accepted. I think you flew down to Florida on 24 hours’ notice to start the recapitalization process and get the bank turned around. So the question I’d love to start with here is: What possessed you to do such a thing at such a precarious time, and how would you recommend that executives act decisively on similar opportunities in the current environment? 

John Kanas: I’ll answer that in a minute, but you just reminded me by the introduction that I have lived through more than my share of crises, I hope that’s coincidental. My timing probably could have been better in terms of my career, but I did manage to get four or five of them in along the way, unfortunately.

Well, remember that the Great Crisis was named the Great Crisis for a reason. Things were a mess by the end of 2007 and ’8. And that crisis, unlike this one, fell very heavily on the banking sector. Banks were, generally speaking, under-reserved, overexposed to real estate investments, and as a result of that, most banks had very weak balance sheets – as is witnessed by the fact that we saw so many bank failures happen during that time and so many very large, venerable organizations go by the wayside.

One of the reasons that we were successful is that most of the players who would have normally been bidding on something like this were in a penalty box. They were being held back by regulators themselves because just about everybody had their share of non-performing loans and weak real estate credit. So while the regulators, I think, would have most likely preferred to have sold BankUnited to an existing organization, the existing organizations were busy binding their own wounds. 

The FDIC, in the end, sent out 63 books – bid packages – and only got three responses: Mine, one other private equity investor, and Goldman Sachs as a tag team with TD Bank, so it was a tough time.

And I think probably the reason that I was successful was we had a great team of people. We had Blackstone, Carlyle, Centerbridge, and Wilbur Ross teaming with me and with a full management team that had just become available because two years earlier I had sold North Fork Bank, a lot of those people left North Fork and were waiting for the next opportunity. So we were able to put together money and investors and management talent all at the same time.

Also, because I was out looking for things like this: I identified BankUnited more than a year before it failed and had a chance to get to know their balance sheet very well before anyone else did. So during the relatively short period of time that other banks were given to bid, we had already done most of our homework and we were able to push our bid pretty quickly. 

Max Simkoff: It’s actually an interesting point to touch on there, where you mentioned that you had been looking for things and you had the foresight to be able to look at things well in advance. 

What specific opportunities are you seeing right now in the banking world or in general you think are overlooked and which have the right foundation for success as we emerge from the current crisis and might offer similar opportunities to the things you were looking for back then? 

John Kanas: As is usually the case, Max, the market tends to overgeneralize and overshoot one way or the other, and it’s made the general decision about the banking sector right now that it’s pretty negative. In my mind it’s a little confusing because the banks are in much, much, much better shape than they were going into the great downturn eleven years ago, I guess that was. There are a great number of banks whose stocks have fallen to historic lows that are going to be perfectly safe and come out of this very successfully, because they have iron-clad balance sheets, they have plenty of capital, they have plenty of reserves against even the most difficult of circumstances that one could imagine. So there are some very good buys in the banking space.

But it’s not a time when you buy the space – you have to buy individual companies. And some of the individual companies represent extremely good value right now. So that’s the advantage or the opportunity that’s laying out there for investors. For bankers themselves, for those people who are running those institutions that they know because they have such strong, fortress balance sheets that this is the time for them to start conversations with weaker institutions, and make moves toward consolidation, which we’ve been saying is inevitable for the last five years, I think now this will probably push the agenda a little bit harder. 

Max Simkoff: You mentioned one of the strengths of you being able to seize an opportunity in 2008 with BankUnited with the quality of your team, and clearly we’re in an unprecedented time right now where companies across nearly every industry are downsizing and thus their teams are being tested on a daily basis. So, having had a chance to put together a really strong leadership team and see that team tested under really difficult circumstances, what would you recommend to motivate and unite a leadership team that’s already under pressure to perform in the face of an unprecedented crisis with its operational challenges like we’re seeing right now. And maybe, to the extent you recall, what were some of the things that you found to be particularly resilient about the team that you put together to lead BankUnited that would be relevant now.

John Kanas: I guess the first thing I’d do is show them the newspapers that say 40 million people are out of jobs or on unemployment, and it inspires people to pay careful attention to the job that they have. But to be frank, all kidding aside, let me start with the last part of the question first, and that is: What are the qualities that we’d expect to find in a management team like this and why did the one that we put together succeed? Our management team had been together, for the most part, for several decades and had a chance to work closely together, built up a great deal of trust between each other, and had been successful at their prior endeavors, both at North Fork and other institutions before North Fork.

But in terms of the strategy of uniting a team like this under pressure, I think it’s very often that we forget about the importance of the role of the CEO. And Max, you know about this – you’re going through it yourself, you’re the leader of your organization. The team pays a lot of attention to what you do and what you say, how you operate, and you do, as every CEO does, set the tone for the whole organization. So I was always careful to remember and to remind myself that I was being watched very carefully by the team and the team, in some respects, were emulating my behavior. And staying close to the team during times like this and staying and keeping the team staying close to each other, is very, very important. And I know you understand that because I’ve seen you operate. 

Max Simkoff: I’ve had the benefit of good advice from folks like you to help me along the way and maybe kind of in the same vein as that: You’re known as being someone who is able to make fast decisions and speak your mind – I’ve certainly called you a lot of times for advice in this area – so if you had to say the one thing to executives right now, banking executives, mortgage executives, executives in general like you, if you had to say the one thing that they don’t likely want to hear but need to hear to help their businesses survive in the current environment, what would that be?

John Kanas: You know, most of us, when we sit down and try to plan our way through circumstances like this, we devise several different scenarios, right? The best case scenario, the most likely scenario, and the worst case scenario. Given what’s going on and given what we’re facing moving into the summer and into the fall, I think the best advice I can give people is throw away the best case and the most likely case, and prepare your company to cope with and survive and hopefully flourish in the worst case scenario. Because if I’m right about losses finding their way through banks’ balance sheets later on in the year, I think that things could get pretty tough, maybe tougher than we are really realizing – what the market is really realizing – right now. 

Max Simkoff: Yup. That’s good advice. Maybe even taking that worst case scenario – that was a worst case scenario three months ago – and making it your best case scenario. 

John Kanas: And cranking it up a little bit, that’s right. And look, that goes with everything that we do and in all walks of life, right? This is a good time to make no assumptions and to prepare for the worst.

Max Simkoff: Agreed. 

I want to talk about the decisions that you made leading up to ultimately selling North Fork Bank to CapitalOne. In 2004, you decided as CEO of North Fork Bank to acquire Greenpoint Financial. That was obviously a very big deal. I think it was a $6 billion acquisition that took you and North Fork deeper into mortgage origination. And then just two years later, at peak market conditions, you then decided to sell North Fork Bank to Capital One for nearly $15 billion. What about the broader macro conditions told you in 2004 that you should buy Greenpoint? And then, what about the broader macro conditions just two years later helped you make a decision to ultimately sell the overall business?

John Kanas: I get that question a lot, and analysts who know me very well often say: “So what was the best deal you ever did? And what was the worst deal you ever did?” And my answer is always Greenpoint. 

Because if you recall the way the mortgage was then, how hot the mortgage market was in 2004-2005, Greenpoint was doing $24 billion a year in all day mortgages; the market for the product on Wall Street was hot as fire; the profitability in that business had never been greater; and we wanted, we being North Fork, wanted to get in on that business. And instead of doing it and building it ourselves or buying smaller institutions, we decided to do it in one fell swoop with Greenpoint and it worked out very well.

What we didn’t understand and realize was that the market was going to change as rapidly as it did. And obviously we don’t have to go through the memory of that, which is painful for most people. But because we had to get up the learning curve very quickly because most of us weren’t mortgage bankers – although I had some highly skilled mortgage bankers on my team – we had to get up to speed very quickly on what was going on in the mortgage business at that time. So through the prism of Greenpoint and sitting with him every week and watching what was going on in the mortgage business, we were able to, early on, detect trends that were quite alarming in the business. Greenpoint pretty well invented the Alt A product and the volumes were off the charts in that business.

So I spent, and a lot of our managers, spent a lot of time with the salespeople out in the field learning the business from the ground up, and to be frank with you, early on, what we saw was very frightening. We saw things that were not kosher, that were not the way we like to run a business. We saw people taking advantage of the tremendous volumes that were running through that business at that time. I remember once coming home from a board meeting in Greenpoint out in California, and sitting down with one of the guys on our board who was a buddy of mine. And I said, “I think it’s time for us to get out of the mortgage business.” He said, “How do we do that?” I said “There’s only one way to do that, and that is to get rid of the whole thing.” So the fear of what was going to happen in 2007, and ’6 and ’7, really forced us to think about getting rid of it. 

Because North Fork at that time, having added on Greenpoint to the company, was a very, very valuable property and very interesting to a number of different buyers who came our way. And we had a small auction going for about a year without ever announcing that the company was for sale. But we had a number of very interested buyers who paid a very, very high price. We sold North Fork for just short of five times, tangible book. So it was not hard to take the transaction. 

Max Simkoff: So it’s interesting, how much of that decision ultimately to sell what you say it was based on paranoia, healthy paranoia. 

John Kanas: About 100 percent. 

You know, I was reminded of the expression, you know, paranoid people have real problems, too.

Max Simkoff: Right.

John Kanas: I think it’s a quality – a little bit of paranoia is an admirable quality of all CEOs – I’m always the guy upstairs. When everybody else is celebrating the deal, I’m the guy upstairs wondering what’s going to go wrong. That was certainly part of the process. 

Max Simkoff: Definitely. I guess the last question I’d love to ask here, John, as we’re navigating this current crisis, we’ve got both community banks and large national banks playing an integral role in the distribution of emergency stimulus funds. Certainly for real estate lending, specifically, community banks are on the front line and many will probably struggle to pull through. And so, thinking about those two different kinds of lending institutions, where can community banks and large national lenders each play to their strengths and help increase the stability of markets overall that they operate in and lead, and then which areas should both be careful to probably avoid, so they don’t in the process exacerbate the problems that they’re trying to solve? 

John Kanas: I think that the community banks had a chance to emphasize their overall value in this country during the PPP program, where, to be frank with you, they outshined the large financial institutions fairly well. At least here on the East Coast, most of that money was given out by community banks. The processes were simpler. They got up and running much quicker and consequently were able to help thousands of people who were stuck in the mechanism of the large institutions and God knows if they would have ever gotten out. So the value of community banks, high-touch business and their interest in their customers certainly came across loud and clear. 

You’re right, however, that a lot of the community banks, especially the ones that don’t have a solid capital base right now, are likely to have a very difficult time as this – whatever this is – unfolds,  this pandemic, which is driving a masterful recession, the likes of which probably, hopefully, we’ll never see again.

We’ve talked about community banks and the whole community banking sector consolidating and there getting to be fewer banks as time goes by. And I think you’ll see more of that as this pandemic unfolds going into the summer and in the fall. However, you know, banks are not bought, they’re sold. And we’ve been predicting a consolidation of community banks in this country for the last five years, and to be frank with you, it hasn’t happened yet. But I think this will push the process along very quickly. The large institutions will always have the value that they have to this country, and that is: they’re massive; they tend to at least now, especially under Dodd-Frank and under the new rules with capital, they are very, very safe; they have the ability to access capital markets when no one else can, As you’ve seen recently; and there will always be those very large institutions, even though from time to time, politically speaking, people would wish those institutions were smaller.

To be frank with you, in today’s world, with the size of the business that they have to do and the companies they have to serve, those institutions will get larger and hopefully stronger over time. So there’ll always be room for both. But in terms of number of institutions, the small banks are going to have a tough time. 

Max Simkoff: Got it.

OK, I’m going to take a few questions from the audience here. The first one that I have goes as follows: It was a Democratic administration who oversaw most of the stimulus provided in the 2008 financial crisis. Now it’s a Republican administration utilizing many of the same methods and tools to help the economy. Having seen this across administrations and market conditions over the past 40 years, how involved do you think the government should be in facilitating the way out of the current crisis for the banking industry? 

John Kanas: That is the question of the day. And it gives rise to a discussion of the subject of free market enterprise and free market capitalism, because one can be assured that – if not in this coming election, certainly in the next presidential election – one of the hottest topics is going to become: “How involved should the government be?” And in fact, the progressives on the left, I would imagine, are going to make a very strong case now that: “How are you doing with that free market capitalist system when every eight or nine years we have to throw two or three or four trillion dollars of government money on the table to keep it alive?”

So my answer is: The government needs to be very aggressive now and continue to support this economy at the rate they are and probably even more. I think you’ll see more fiscal policy changes coming up in the summer. Even though the chairman has warned us away from negative interest rates, there will be more monetary movements in the monetary system, as well. So I think it gives rise to the whole question of free market capitalism and how involved should the government be, not only now but forever. It’s going to be very tough to make a case against universal health care now, especially given what we’ve faced – and I don’t know how much you’ve studied the problem, but now that most hospitals in this country have reduced their population of Covid patients, they don’t have any patients. And those companies are bleeding cash at an alarming rate. So this is going to be the question of the hour and it’s not going to be answered quickly and it’s going to go on for years.

Max Simkoff: Here’s another one that came in on the topic of team. What were some of the specific roles you hired for as CEO of a bank during crisis times that you wouldn’t have needed, or you wouldn’t have thought of as important during normal times? 

John Kanas: When we went into the crisis – all of the crises I’ve been through, and most of them really were centered around loan problems – we first made the mistake of thinking that our team, our staff who had made the loans that eventually went bad and that we were dealing with on a work out basis, that those same folks should be the ones to work out the loans, that turned out to be a very bad decision. To be frank with you, when we really started to show improvement in North Fork in 1990, 1991, when we were fighting against the very difficult local recession here on Long Island, we brought in experts from all over the country that had a lot of experience dealing with problems like this in other parts of the country and basically took our lenders off the stage completely, let them go back to lending money and brought in a whole new team of people to work out the loans. Thank God we did. I mean, that probably saved the institution. 

Max Simkoff: Great. You know, I got another question, the other question that came in was interestingly about the decision that you most regret making as a CEO, and so maybe I’ll ask that one quickly. But I want to make sure I leave a minute or two to finish with one more question that I had that I think would be helpful. So, you’ve often said that the Greenpoint acquisition was both the best and the worst decision you made. But is there another decision that you think back on and say, you know, “Boy, I really wish I would have made that decision in a different direction”? 

John Kanas: Well, I’ve answered this way before but we did 17 acquisitions, not counting Greenpoint, one of them was a real clunker. And frankly, if I had it to do over again, I wouldn’t do it. I’ve never told anybody who it was and I’m not going to start now, but one of the acquisitions we made, we probably – I specifically – but we certainly fell in love with something that we paid dearly for that we probably shouldn’t have done. In the end, it didn’t matter, it became part of a great company. But it was a lot more work than we all expected it to be. 

Max Simkoff: Got it. OK, so the last question I have for you before we wrap is one related to a personal story you had told me and I think it’s a good way to end our conversation just in terms of helping folks who are certainly facing a lot of adversity right now to find points of optimism. So I apologize if I butcher this, but I recall you telling me a story about a low point you reached when you were CEO of North Fork during a particularly difficult time for the bank where you realized that not only was your stake in the bank near worthless, but you were technically underwater even on the equity in your own home – and certainly a very stark contrast to the ultimate success that you found. Having been in a situation like that yourself, how did you manage to survive the pressure or the personal pressure in the position that you were in during such a difficult time, and what advice would you give to other folks right now under similar difficult circumstances? 

John Kanas: Yeah. Thanks for reminding me of those days by the way. 

That was 1990-1991 for me and things were very bad. And in fact you’re right, I was technically I suppose bankrupt at the time because all I really owned in the world was with North Fork Bank stock which we’d been selling at $30 a share, went down to $2 during this time period. 

The mortgage that I had was held by another local institution. I went to see them and told them the truth and asked for their help and stayed close to them during this whole time, gave them extra collateral for the loan, And frankly, I think that’s good advice for anybody if you’re having a problem with a loan. The worst thing in the world that you can do is not talk to your lender and not let them know what’s going on – you certainly need to be close to them. And especially now, because there’s a great deal of sympathy in the market right now for folks who are struggling as a result of the pandemic.

That won’t last forever, by the way – banks will start being banks again as soon as the regulators start being regulators again, which is coming up in the next few months. So staying close to the people who lent you the money in the first place and working with them on a workout is obviously the best possible advice.

In terms of how I made it through, it’s kind of a personal thing. It made me sick because I saw what was going on. We’d fired 30 or 40 percent of our staff and we had one year where the bank lost $30 million. It was just awful. Seven banks around us had failed and so there was no good news in the market anywhere here. It made me pretty sick. I mean, I couldn’t sleep, couldn’t eat, lost 30 pounds. I remember the turnaround point was I was sitting on my closet floor one morning at four o’clock in the dark. My hands over my face and my pajamas were soaking wet – it was the third pair of pajamas I had sweat through in the night – and my wife walked in and saw me. And after she had been coddling me for a while, she looked at me and said, you know, “You’re supposed to be a smart guy. Get up, go to work, and figure this out.” And that helped. That jarred me loose. 

Also then that same night when I was coming home from work, my car phone rang and I recognized the number. It was the largest shareholder in the bank and he had a bit of a reputation of being a tough guy. And I knew that his stock had been down, I told you from almost 30 to 2 – and the last thing in the world I wanted to do was answer that phone, but I did. And I’ll never forget, his name was Steve Levy, I don’t think he’s alive anymore. I expected him to just absolutely destroy me, and he said: “You know, I’ve read everything you’ve done. I’ve looked over the balance sheet of the bank.” He said, “I’m one of those few people who thinks you’re doing everything that you can, and I suppose that not everybody is still on your side.” And I said, “That’s right.” He said the same thing my wife did, he said, “Go home and get a good night’s sleep and get up and fix this thing since you broke it. And those of us who believe in you will always believe in you.” And I never forgot him for it. And it gave me the strength that I needed between him and my wife that night. It gave me the strength personally that I keep going. Not easy. Not easy. It’s tempting to quit when something like that happens.

Max Simkoff: Wow. That’s really a poignant story and actually a great way to end, with finding optimism and resilience in the face of challenge. John, I wanted to thank you for taking the time to talk with us today. Your insights on the current crisis, your past experience, the difficult decisions that you had to make, and the immense success that you’ve seen, I think are super valuable for the folks who’ve been able to attend here. So I want to thank you again for speaking with me, and as always, really, really value having the chance to work with you as well.

John Kanas: Thank you, Max and everybody. Good luck at States Title.