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The financial crisis: signaling a new order of communications

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The financial crisis: signaling a new order of communications

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Content Copyright 2009 Joan Wickham THE FINANCIAL CRISIS: SIGNALING A NEW ORDER OF COMMUNICATIONS by Joan Wickham A Thesis Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree MASTER OF ARTS (STRATEGIC PUBLIC RELATIONS) May 2009 ii Acknowledgements I wish to acknowledge Associate Professor Jennifer Floto for her unwavering encouragement and support during this journey. Thanks is also due to Bob Feldman, principal and co-founder of PulsePoint Group and Associate Professor Jay Wang, for their valuable insights and critiques of my research. ii Table of Contents Acknowledgements ......................................................................................................... ii Abstract .......................................................................................................................... iii Chapter 1: Introduction ................................................................................................... 1 Chapter 2: Lehman Brothers Holdings, Inc. ................................................................... 3 Chapter 3: American International Group (AIG) .......................................................... 16 Chapter 4: Washington Mutual and JPMorgan Chase .................................................. 33 Chapter 5: Summing Up ............................................................................................... 46 References ..................................................................................................................... 55 iii Abstract The financial crisis of 2008 exposed critical weaknesses in some of the world’s largest corporations. As problems surfaced, company leadership was forced to answer to shareholders, employees, customers, government regulators and even American taxpayers. Communicators were tasked with providing difficult answers to these stakeholders in the midst of a rapidly changing media environment. This paper employs a case study approach to examine the communication challenges that faced Lehman Brothers, AIG and Washington Mutual as the financial crisis unfolded in the latter part of 2008. Analysis focuses upon communication efforts among key stakeholders of each firm in an effort to identify successes, failures and key learnings. Analysis of these cases signals a new order of crisis communications in which flexibility and openness are essential. While preparation remains vital to effective crisis communication, practitioners must be armed with impeccable judgment to counsel leadership in such unpredictable times. 1 Chapter 1: Introduction The financial crisis has shaken the world’s economy and thrown the U.S. into a severe and lasting recession. As Wall Street has fallen under the public’s microscope, firms at the front lines have experienced significant communication challenges. Bankruptcy, layoff and buyout announcements have come rapidly, causing financial news to jump out of the business section and onto the front page. Widespread attention and focus on these firms has put incredible pressure on communicators, demonstrating the importance of crisis preparedness, mitigation and response. As their audience widens, financial firms struggle to find an authentic voice that plays in mainstream media. Reporters linger on every word and gesture of CEOs and top executives, whose names and faces are suddenly recognized around the world. Staving off fear, anger and panic requires well-constructed messaging, honest delivery and impeccable judgment. To make matters more difficult, dubious audiences are met with a dramatically shifting media landscape. Many have called this the most significant financial crisis since the Great Depression, yet the media environment could not be more different. Headlines are updated every second and are at the fingertips of people all over the world. Where traditional media falters, bloggers fill in the gaps, providing firsthand reports and offering insights from behind the scenes as news breaks. Investors no longer wait for the morning paper to check share prices, but can follow the market all day long and respond instantly to its peaks and falls. For customers, reviews of products and services are a 2 click away and employees may receive a Google alert about their company’s future before hearing anything muttered inside its walls. This complex environment only amplifies the importance of crisis preparedness for communicators. Company officials are faced with the ongoing challenge of staying ahead of the news and responding quickly, but not hastily, to maintain confidence among their stakeholders in an increasingly volatile market. This paper employs a case study approach to examine the communications challenges that faced companies as the financial crisis unfolded in the latter part of 2008. The cases of Lehman Brothers, AIG and Washington Mutual were selected for review due to the remarkable speed of events, devastating stakes and unprecedented outcomes that characterize the recent history of these companies. Analysis will focus upon communications efforts among key stakeholders of each firm in an effort to identify successes, failures and key learnings. Finally, general recommendations for crisis communication within the financial sector will be provided. 3 Chapter 2: Lehman Brothers Holdings, Inc. On Monday, Sept. 15, 2008 Lehman Brothers Holdings, Inc. (LEH), a leading financial services company, shocked the world by filing for bankruptcy protection. Like many of its competitors, the global financial services firm faced staggering losses due to the subprime mortgage crisis. With shares losing 73 percent of their value over the year 1 , Lehman’s troubles were no secret, yet few would have predicted the large firm’s fall, which marked the largest bankruptcy in U.S. history. Founded in 1850 by two cotton brokers in Mongomery, AL and incorporated in 1983, Lehman Brothers provides financial services to corporations, governments, municipalities, institutional clients and wealthy individuals all over the world. The company operates in three main segments, including Capital Markets, Investment Banking and Investment Management. Revenues are generated by advising and structuring transactions, serving as a market maker and intermediary in the global marketplace, originating loans, providing investment management and advisory services and acting as an underwriter for clients. Like many of the troubled firms, the 150-year-old investment bank’s problems stem from the subprime mortgage crisis. As a smaller firm with significant investment in risky mortgages, Lehman Brothers began to lose investor confidence in 2007 as the crisis began to unfold. The firm’s stock steadily declined over the summer of 2007 with shares 1 Jenny Anderson and Eric Dash. “For Lehman, More Cuts and Anxiety.” The New York Times. 28 Aug 2008. 4 falling as low as $51 as compared to the year’s $85 peak in February. 2 In August, the firm was forced to close its suprime lendor, BNC Mortgage, cutting 1,200 positions and taking an after-tax charge of $25 million. 3 Still saddled with remaining low rated mortgages, Lehman’s losses accumulated over 2008. As economic turmoil came to a head in 2008, the summer months once again proved tumultuous for Lehman. After posting the first quarterly loss as a public company on June 16, rumors began circulating about the possibility of a takeover. Following the earnings announcement, CNBC reported that Barclays (BCS), Toronto Dominion (TD) and Blackstone Group (BX.N) were interested in taking a stake in the firm. 4 CEO Richard Fuld did his best to deny rumors, stating, “I have said many times that I very much believe that, with this franchise’s strength and power, we can go it alone.” Yet many experts remained adamant that the firm may have no choice but to sell and rumors of interested buyers persisted, with the Wall Street Journal reporting in late August that the Korea Development Bank (KDB) was interested in bailing out the troubled firm. 5 There was some speculation of a government bailout for the company, but when the Fed announced its plans to takeover Fannie and Freddie Mac on Sept. 9, hope of an additional government bailout for Lehman faded and stocks plunged. The next day, as 2 Quotes & Info, Yahoo! Finance <http://finance.yahoo.com/echarts?=LEHMQ.PK> (2 Jan 2009). 3 “Lehman Brothers to Shut Down Subprime Unit” Reuters, 22 Aug 2007. 4 Charlie Gasparino.”Lehman CEO Fuld Faces Growing Pressure to Sell.” CNBC, 18 June 2008. 5 “Lehman Bid.” Wall Street Journal, 24 Aug 2008. 5 part of its third quarter preliminary results release, the firm announced that it would spin off the majority of its remaining commercial real estate holdings into a new public company, Real Estate Investments Global (“REI Global”) in early 2009. Fuld’s explanation of the move was as follows, “This is an extraordinary time for our industry, and one of the toughest periods in the Firm’s history. The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing our balance sheet risk, reinforcing our focus on our client- facing businesses and returning the firm to profitability.” 6 Fuld’s attempts to reassure investors proved to be too little too late as shares continued to rapidly dive following the announcement. With no help from the government, the company entered frantic negotiations over the weekend with prospective partners Barclays PLC (BCS) and Bank of America (BAC). Negotiations fell through and on Monday, Sept. 15, Lehman filed for bankruptcy protection, citing over $613 billion in debt against total assets of $639 billion and over 100,000 creditors. 7 The previous largest bankruptcy, which seems meager in comparison, was that of WorldCom in 2002, which had $104 billion of assets. The next day, Barclays announced that it would buy Lehman’s United States capital markets division for the bargain price of $1.75 billion. 8 6 Lehman Brothers Holdings, Inc. press release, 10 Sept 2008. 7 “Lehman files for bankruptcy protection.” MarketWatch, 15 Sept 2008. 8 “Lehman Brothers Holdings Inc.” The New York Times, <http://topics.nytimes.com/topics/news/business/companies/lehman_brothers_holdings_i nc/index.html> (2 Jan 2009). 6 This unprecedented bankruptcy rocked the financial world, marking the beginning of a crisis on Wall Street. The speed, magnitude and significance of Lehman’s fall created a great deal of communications challenges for the firm. Specific challenges that will be addressed in this paper include: controlling rumors, maintaining internal cohesion and stability in time of turmoil, announcing high-profile layoffs and limiting reputational damage from CEO Richard Fuld. Primary audiences for the firm include current investors, potential investors and/or partners, employees, government regulators and the media. During Lehman’s final days, current and potential stakeholders should have been a major focus of communications efforts, as their support was integral to the company’s survival. The statement issued by the firm on Sept. 10 about the firm’s restructuring was followed by a conference call for investors and open to the general public. These calls are generally attended by an audience of investors following a major announcement, yet given the precarious position of the firm, there were a great deal more stakeholders with a vested interest in Lehman’s future. Hence, this was an important moment for current and potential investors, prospective partners and/or buyers, government regulators and influencers such as market analysts to gage the company’s prospects. In this call, Fuld and Ian T. Lowitt, CFO, addressed the audience and welcomed questions. Fuld and Lowitt’s comments were largely optimistic as they tried to reassure the audience of the firm’s prospects. Following general statements from Fuld and Lowitt, the pair opened the call to questions. While many questions called for technical clarifications on restructuring, 7 inquiries from Michael Hecht, of Bank of America Securities, cut to the core issues including the impact of recent turmoil on company morale. The Wall Street Journal’s live blog coverage of the call described Fuld’s vocal response to the question as follows, “after a pause, Fuld clears his throat and replies, speaking deliberately and carefully and a little hoarsely, with some emotion:” 9 Let me talk about that. First on employee morale, clearly we spent a ton of time over these last number of years building a strong, very cohesive culture. As I said in my comments, we’ve been through adversity before and we always come out a lot stronger. It would be foolish for me to say that all of our employees have gone through this period unaffected because that clearly is not the case. They have been distracted by rumors, they’ve been distracted a little bit by comments in the press, which I mentioned in my comments. But I will tell you the employees of this firm are holding wonderfully and continuing to do their business day-to-day in a very strong way and that culture is holding. As far as turnover, I see no indication of anything that would be abnormal at all. 10 Fuld’s answer, surely intended to be reassuring, touches on important issues facing Lehman’s employees including rumors and intensive media scrutiny, yet his description of the company’s employees as “holding wonderfully” seems overly optimistic. Although the purpose of this call was to reassure investors of Lehman’s viability in a difficult time, this highly educated audience was surely looking for candid answers. Given layoffs made a few weeks earlier and ongoing press coverage of employee’s 9 Heidi N. Moore. “Live-Blogging the Lehman Conference Call.” Wall Street Journal Web site. 10 Sept 2008 < http://blogs.wsj.com/deals/2008/09/10/live-blogging-the- lehman-conference-call/> 10 Lehman Brothers Inc. Preliminary 3 rd Quarter Earnings Announcement Conference Call Transcript, Seeking Alpha, 11 Sept 2008. <http://seekingalpha.com/article/95098- lehman-brothers-preliminary-f3q08-earnings-call-transcript> (2 Jan 2009). 8 anxieties, describing the workforce as merely “distracted” trivializes the dire situation to a great extent. As a follow up, Hecht poses question on everyone’s mind – was Lehman considering selling out to a larger player to diversify the firm’s funding mix and help restore confidence? Fuld answered as follows: Well, we’ve had a number of board meetings, some in person, some telephonic, over the last number of weeks and months and clear goal was to discuss all of these, which we’ve taken you through today and all of the strategic options and I must say the board has been wonderfully supportive, clearly understand and understood each of those options and the implications of each to the firm. And as far as the last question about the sale of part or all of the firm, I have always said that if anybody came with an attractive proposition that made it compelling for shareholder value, that would be brought to the board, discussed with the board, and evaluated and that has not changed. 11 This statement, while extremely general and safe, actually demonstrates a shift in Fuld’s messaging since he does not emphasize Lehman’s ability to survive on its own – as he did in a previous statement to the Wall Street Journal – but rather indicates a newfound openness to reviewing buyout offers. This softening of course, particularly during a call to reassure investors and pitch Lehman’s new tack, seems like a fairly strong admission of the company’s problems. 11 Lehman Brothers Inc. Preliminary 3 rd Quarter Earnings Announcement Conference Call Transcript, Seeking Alpha, 11 Sept 2008. <http://seekingalpha.com/article/95098- lehman-brothers-preliminary-f3q08-earnings-call-transcript> (2 Jan 2009). 9 When the markets opened following the call, Lehman’s stock prices dropped dramatically, falling from $7.25 to $4.22. 12 Despite the company’s efforts, analysts believed that the firm’s measures were not enough to resolve problems at Lehman, causing many to believe that a buyout was ahead. In an article titled. “Lehman Said to Be Looking for a Buyer as Pressure Builds,” The New York Times described the actions as, “somewhat of a disappointment to Wall Street analysts and investors, because they were expected and because some of the moves could take months to complete.” 13 Although Fuld emphasized the “wonderful” employee morale, there were certainly a great deal of serious internal communication issues facing the firm during this time of instability. As evidenced by Fuld’s statement, workplace culture was bolstered at Lehman. The company offered competitive benefits and “life balance programs” including flex time and backup childcare. Lehman was also well known for its generous stock offerings to employees, which own 30 percent of the publicly traded company. 14 Boasted as a symbol of the employee’s belief and dedication to the company, their large stake makes the employees an even more important and influential audience for Lehman. Lehman’s problems had impacted the workforce in a very tangible way aside from their stock options. As previously mentioned, a major layoff announcement had been made just weeks before on Aug. 28. Since June 2007, more than 6,000 Lehman 12 Quotes & Info, Yahoo! Finance <http://finance.yahoo.com/echarts?=LEHMQ.PK> (2 Jan 2009). 13 Jenny Anderson and Andrew Ross Sorkin. “Lehman Said to Be Looking for a Buyer as Pressure Builds.” New York Times. 10 Sept 2009. 14 Heidi N. Moore. “Lehman Brothers: Are Employees the Poison Pill?” Wall Street Journal. 2 Jul 2008. 10 workers lost their jobs at the firm. Of course, layoffs and cost reductions were not unique to Lehman, but were plaguing the financial industry as a whole. This scarcity of employment opportunities contributed to further anxiety among Lehman’s workforce, who were terrified of losing their job in such a tough market. In times of intense pressure, keeping employees calm and motivated is crucial to maintaining stability. This means keeping lines of communication open and transparent so that employees trust leadership to keep them informed, thereby reducing rumors and helping the organization continue to run as smoothly as possible. Yet as Lehman struggled, employees felt less than connected and informed to company leadership. After the Sept. 10 conference call, employees were on edge, as buyout seemed imminent. In fact, employees quoted in The New York Times voiced their anxiety and frustration about the situation. “Everyone is walking around like they have just been Tasered…Everyone was hoping we would pull through. Now, that is not really an option.” 15 Statements also indicated a lack of trust between employees and leadership, as many employees felt disconnected from management. “’We feel like we have been controlled by events and haven’t controlled them,’ said one rank-and-file employee. ‘And it has just been the most punitive market. Is their frustration with the management team? Of course.’” 16 Blame among employees had fallen to Fuld, who had been reluctant to sell earlier, as other employees expressed: “’I’m not a millionaire like a lot of 15 Geraldine Fabrikant and Eric Dash. “For Lehman Employees, the Collapse Is Personal.” The New York Times. 11 Sept 2008. 16 Ibid. 11 these guys. Of course this is on Dick’s hands…It all happened on his watch.’” 17 According to the article, Fuld was “not available for comment” about his employee’s concerns. 18 To make matters more difficult, all eyes were on Lehman. The firm experienced intense pressure from media during its final days, adding further stress for communicators to maintain unity and trust among employees. The alarming bankruptcy announcement on Sept. 15 garnered media coverage worldwide. Looking for emotional hooks, media focused on those who experienced the greatest losses – the numerous employees who suddenly lost their savings and their jobs. As Fortune Magazine editor Andy Serwer described in his blog, “The last hours, minutes really of one of the world’s largest investment banks make for a pretty unusual spectacle. I’m standing outside Lehman Brothers headquarters on 7 th Ave and 50 th street in New York City, watching Lehman Brothers die.” 19 As the crowds gathered, watching people file out of the building with boxes and table lamps, media stormed the sullen employees, trying to find out what transpired inside Lehman’s walls that day. According to Fortune Magazine’s blog, most did not answer questions, stating “no comment.” Yet some muttered their frustrations about the media “jackals” outside. In his account, Serwer describes the media frenzy, as reporters 17 Geraldine Fabrikant and Eric Dash. “For Lehman Employees, the Collapse Is Personal.” The New York Times. 11 Sept 2008. 18 Ibid. 19 Andy Serwer. “Captains Blog: Lehman’s dying hours.” Fortune Magazine. 15 Sept 2008. 12 tried “in vain to get interviews. I managed to ask one guy how he felt: ‘Look at all of us with boxes,’ he said with a grimace. ‘What do you think?” 20 Although many employees were hesitant to talk to media it was only a matter of time before the details of Lehman’s internal announcement were leaked. Employees were issued a memo in Q&A form that stated: Lehman Brothers will be open for business this week, so you need to report to work unless instructed not to do so by your manager…The firm is working to ensure continued operations in order to plan and effectuate an orderly liquidation and sale of assets. You will be notified when your employment is terminated. 21 Many departments were also notified in large groups on Monday morning and instructed to start packing their things and await termination news from their supervisors. Despite Lehman’s troubles, employee accounts indicated that the bankruptcy announcement came as a shock among internal audiences as well. Below is a statement by former Lehman senior vice-president of equities, Henry Dodds: Over a weekend, the wheels had come off of a fully functioning and vibrant business. That sudden cessation of normality struck home to us all. Some were in tears, others were angry. Someone shouted from the back of the room. I looked at the faces of my friends and colleagues. They were pale and strained. 22 20 Andy Serwer. “Captains Blog: Lehman’s dying hours.” Fortune Magazine. 15 Sept 2008. 21 Andrew Tangel and Douglass Crouse. “Grim day for Lehman employees, including many from Jersey.” NorthJersey.com. 15 Sept 2008. <http://www.northjersey.com/business/Grim_day_for_Lehman_employees_including_m any_from_Jersey.html> (2 Jan 2009). 22 Henry Dodds. “Behind the scenes as Lehman fell.” ThisisMoney.co.uk. 21 Sept 2008. <http://www.thisismoney.co.uk/news/article.html?in_article_id=452469&in_page_id=2> (2 Jan 2009). 13 Given the situation, these feelings of frustration are not at all surprising. However, Lehman’s leadership team should have prioritized efforts to limit shock and anger among employees by maintaining open and sincere internal communication. Keeping employees informed was undoubtedly a difficult task considering how quickly the company unwound. Yet this communication was vital in order for Lehman to control rumors, reduce panic and ensure that the company kept functioning as well as possible in its final days – particularly if pursuing a buyout. Employee statements point to a lack of information, which surely perpetuated feelings of anger and resentment toward the firm. “’There’s a feeling of, How did it get this bad?’ one worker said. What explanation he had heard, he said, had come from media reports, not company managers.” 23 There are, of course, limits to what can be communicated to employees in these situations, but information that can be shared needs to be passed along as its available to help limit employees’ frustration. As indicated by these accounts, Lehman’s internal communication during this time of crisis was less than ideal. Better communication with employees leading up to the bankruptcy announcement might not have saved the company from folding, but certainly could have helped control rumors and improve media coverage. Given the media’s intense focus upon employees during the firm’s final days, ensuring that the workforce was more informed could have had a significant reputational impact for Lehman. A more unified workforce could have increased pressure on lawmakers to aid 23 Andrew Tangel and Douglass Crouse. “Grim day for Lehman employees, including many from Jersey.” NorthJersey.com. 15 Sept 2008. <http://www.northjersey.com/business/Grim_day_for_Lehman_employees_including_m any_from_Jersey.html> (2 Jan 2009). 14 the firm and perhaps make the company more valuable to potential investors, as morale was an important issue raised during the Sept. 10 conference call. Under intense pressure, Lehman’s management did not effectively reassure investors and government regulators of the firm’s viability, nor did they keep their employees adequately informed and motivated. Many of Lehman’s stakeholders were particularly dismayed by Fuld’s leadership during this period. The CEO did not issue a statement on Sept. 15 when his company announced its bankruptcy filing and did not make any public appearances until Oct. 6, when he testified before a Congressional panel. During the five-hour hearing, Fuld was forced to defend the integrity of the firm as well as his and his colleagues’ exorbitant salaries. With lawmakers and media listening intently, Fuld did not express the level of accountability that many expected, and even demanded. The New York Times summarized the hearing as follows: “Richard S. Fuld Jr. blamed the news media. He blamed the short-sellers. He blamed the government, as well as what he characterized as an ‘extraordinary run on the bank.’ But the chief executive of Lehman Brothers Holdings, the bankrupt remnant of a once-great investment house, never really blamed himself.” 24 Clearly, Fuld’s testimony did not play well with the media, nor did it appease angry lawmakers. Committee chairman Henry A. Waxman summarized Fuld’s statement as follows: Mr. Fuld takes no responsibility for the collapse of Lehman. Instead he cites, a, quote, litany of destabilizing factors, end quote, and says, quote, in the end, despite all our efforts, we were overwhelmed, end 24 Bernie Becker and Ben White. “Lehman Managers Portrayed as Irresponsible.” The New York Times. 6 Oct 2008. 15 quote…[Fuld’s testimony and Lehman’s internal documents] portray a company in which there was no accountability for failure. 25 Perhaps the greatest oversight here, was the CEO’s failure to apologize to his disheartened and abandoned employees, whose lives had been torn apart by the collapse. Fuld’s unapologetic demeanor did him or his stakeholders little good by perpetuating the vicious stereotypes of Wall Street and further tarnishing the reputation of his former company, his colleagues and himself. 25 “The Causes and Effects of the Lehman Brothers Bankruptcy.” Preliminary transcript from the House of Representatives, Committee on Oversight and Government Reform. 6 Oct 2008. 16 Chapter 3: American International Group (AIG) On Sept. 16, one day after Lehman Brothers filed for bankruptcy protection, the Federal Reserve decided to change course and provide insurance giant American International Group (AIG) with an $85 billion credit facility to keep the company afloat. In a week of unprecedented financial developments, this controversial move marked the largest bailout of a private company in the Federal Reserve’s history. It also gave the U.S. government a 79.9 percent equity stake in the AIG, essentially federalizing the company. AIG, once the largest insurance company in the U.S., was founded in Shanghai in 1919 by Cornelius Vander Starr, who started selling marine and fire insurance in the Philippines, Indonesia and China. Maurice R. Greenberg took over the company in 1960, building a complex global empire that focused on making giant commercial deals and providing innovative new insurance products. After nearly 50 years of service to the company, Greenberg was forced to resign in 2005 after investigators found that the company had goosed its financial performance through suspicious transactions and improper accounting practices. Since Greenberg’s resignation, the company has faced significant financial challenges resulting in shareholder frustration and leadership changes. Greenberg was replaced by Martin Sullivan, the company’s co-chief operating office vice chairman, but Greenberg remained the largest shareholder of the company. Under Sullivan’s watch, some major problems developed in a unit of the company that sold credit-default swaps (CDs), a derivative designed to protect investors against default in various assets, including subprime mortgages. Due to mounting losses, Joseph Cassano, who headed the 17 troubled AIG Financial Products unit, retired and in May the company announced its search for a new financial officer as well. After the company announced back-to-back quarterly losses for the first time in its history, Sullivan was asked by the board, and Greenberg, to resign on June 15, 2008. Robert B. Willumstad, chairman of AIG’s board and former top executive at CitiGroup, was named as the company’s new CEO. Even though earnings had dropped, the company’s credit rating remained strong, which pulled the company through the spring and summer months. Yet as major financial players began to fold in the fall, even if AIG had the credit to obtain a needed cash infusion, it became unclear who would actually be able to lend the sum. When credit ratings agencies such as Standard & Poor’s began downgrading AIG on Sept. 14, causing stock prices to fall steeply, the company had few options for survival. Considering the company’s $441 billion swap portfolio, which involves many of the world’s leading financial players 26 , the Federal Reserve Board was extremely concerned about the implications of AIG’s failure. Thus, on Sept. 16, the board announced the $85 billion bailout stating, “in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.” 27 Conditions of the deal gave the government an 80 percent stake in the company and to acknowledge mistakes made, hinged upon Willumstad’s 26 Nanette Byrnes. “Where AIG Went Wrong.” Business Week. 29 Sept 2008. 27 “Federal Reserve Board, with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG).” Board of Governors of the Federal Reserve System. 16 Sept 2008. 18 resignation. Timothy Geithner, president of the Federal Reserve Bank of New York, made it clear that there was to be no negotiation, telling Willumstad, “This is the only proposal you’re going to get…And there’s one condition – we’ll replace you as CEO.” 28 After a three-hour meeting and few choices, the AIG board of directors accepted the deal and Edward Liddy, former chief executive of Allstate, was named CEO on Sept. 18. Less than a month later on Oct. 8, AIG disclosed that it had already drawn down to $61 billion of the loan, causing analysts to further downgrade the company’s credit ratings and placing AIG once again, on the brink of folding. In response, the Federal Reserve agreed to loan the company an additional $37.8 billion to improve liquidity and allow the AIG to make the adjustments needed to bring the company back to profitability. 29 Even this sum proved too small, as AIG reported a record third-quarter loss of $24.4 billion from write-downs of investments on Nov. 10. With an enormous stake in the company already, the Federal Reserve was forced to once again, increase the loan. The additional $27 billion added up to a record $150 billion bailout for AIG, with much more lenient terms than previously announced in order to rescue the troubled company. 30 This unprecedented government action posed serious communication problems for AIG. Suddenly, taxpayers were involuntarily the largest shareholders in the 28 Timothy Geithner quoted by Monica Langley, Deborah Solomon and Matthew Karnitschnig. “Bad Bets and Cash Crunch Pushed Ailing AIG to Brink.” Wall Street Journal. 18 Sept 2008. 29 Barry Meier and Mary Williams Walsh. “AIG to Get Additional $37.8 Billion.” New York Times. 8 Oct 2008. 30 “AIG gets $150 billion government bailout; posts huge loss.” Reuters. 10 Nov 2008. 19 company, bearing the weight of AIG’s poor business decisions while prior investors in the company saw their share value evaporate in a matter of days. Internally, employees were faced with yet another change of leadership and the realization that they were now essentially working for the government. AIG also had its customers to worry about; an insurance company hemorrhaging cash is not the most assuring choice to protect your own assets. Investors, who suffered an enormous loss as a result of the bailout, were extremely critical of AIG’s communications efforts. Shareholders felt that they had been misled by company leadership about the risks associated with the infamous Financial Products unit. When formed, the CDs employed by this unit were rated AAA and considered extremely secure, despite being backed by subprime mortgages. Understanding AIG’s investor relations means examining the history of and past communications about this troubled unit. Problems began to emerge in the summer of 2007 as foreclosures increased; causing agencies began to downgrade CDs, which included a high percentage of residential mortgages. On the company’s second quarter earnings call on Aug. 9, 2007, company leadership was forced to defend these products after these downgrades. In his opening statement, Bob Lewis, chief risk officer of AIG, described the relationship of the Financial Products Unit and the residential mortgage industry, stating: On slide 28, we begin our discussion of the activities of AIG Financial Products and the residential mortgage industry. AIGFP's exposure to the market is derived through two sources. First, they write extremely risk- remote super senior or AAA-plus credit protection on highly-diversified pools of assets, some of which include residential mortgages. Second, they are cash investors in highly-rated securities where some portion of 20 the underlying collateral, which may include collateral from many sectors, includes residential mortgages. While both of these activities involve significant notional exposure, the risk actually undertaken is very modest and remote, and has been structured and managed effectively. 31 By describing the risk of these CDs as “modest and remote,” Lewis was not only assuring investors, but also practically denying any risks associated with the product. Comments from Joseph Cassano on the call were similar in nature. When questioned about the CDs, Cassano stated “it is hard for us, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions.” 32 The question is, when did AIG leadership know there were substantial risks involved with these products and was that disclosed to investors? Ultimately, the principal weakness of these CDs that was not communicated was the risks ensuing from market value losses. If the securities insured by AIG lost value, the buyers of the swaps had the right to demand collateral from AIG. Furthermore, AIG was obligated to account for the contracts in terms of their market value. This meant that if the value of the CDs dropped, which it certainly did, the company was forced to make write-downs. After ratings began to drop, trading partners such as Goldman Sachs, Merill Lynch and Société Générale began to demand collateral from AIG. After the firm’s outside auditor, PricewaterhouseCoopers, found out about this in Oct. 2007, the firm was forced to take its first major write-down on the swaps, lowering their value by 31 Joseph Cassano quoted in AIG 2 nd Quarter Investor Conference Call Transcript. Seeking Alpha, 9 Aug 2007. <http://seekingalpha.com/article/44048-american- international-group-q2-2007-earnings-call-transcript?page=-1&find=aig> (2 Jan 2009). 32 Ibid. 21 $352 million. 33 In a presentation to AIG’s internal auditors and Sullivan, a PricewaterhouseCoopers expressed concerns about possible “material weaknesses” in the accounting valuation models that the Financial Products Unit was using. 34 Days later, AIG leadership held a presentation to investors on Dec. 5, 2007 at New York’s Metropolitan Club where the unit was discussed. Although AIG executives clearly realized the potential problems within the unit by this point in time, this still, was not relayed to investors. As the Wall Street Journal reported, Sullivan went so far as to praise the Financial Products Unit’s “models as ‘very reliable’ in analyzing many mortgages, saying that they helped give AIG ‘a very high level of comfort.’” Cassano followed with further assurance, “’We believe this is a money-good portfolio…they models we use are simple, they’re specific and they’re highly conservative’” 35 When questioned about collateral calls, Cassano stated, “We have, from time to time, gotten collateral calls from people…Then we say to them, ‘Well, we don’t agree with your numbers.’ And they go, ‘Oh.’ And they go away.” 36 Yet, sure enough, a few months later AIG disclosed an Securities and Exchange (SEC) filing to announce PricewaterhouseCoopers’ findings about the valuation process, causing the firm to 33 Carrick Mollenkamp, Serena Ng, Liam Pleven and Randall Smith. “Behind AIG’s Fall, Risk Models Failed to Pass Real-World Test.” The Wall Street Journal. 31 Oct 2008. 34 Rogers Parloff. “Wall Street: It’s Payback Time.” Fortune. 19 Jan 2009. 35 Carrick Mollenkamp, Serena Ng, Liam Pleven and Randall Smith. “Behind AIG’s Fall, Risk Models Failed to Pass Real-World Test.” 36 Joseph Casanno quoted by David Voreacos and Elliot Blair Smith. “Cassano’s Statements on AIG Probed by Prosecutors, People Say.” Bloomberg. 26 Nov 2008. 22 employ a different model. 37 Record losses followed, driven by collateral calls and write- downs from the CDs, which ultimately led to the firm’s demise. Given AIG leadership’s relentless bolstering of the troubled unit, investors’ anger seems legitimate. After the bailout federal prosecutors began an investigation to ascertain whether Cassano misled auditors and investors in regard to the CDs. In an e- mailed statement to Bloomberg, Cassano’s lawyer said, “his actions were appropriate, including during the valuation of AIG’s credit-default swaps…He provided full and complete information to investors, his supervisors and auditors.” 38 The Justice Department, U.S. Attorney’s Office and SEC are still working to determine whether Casanno and other executives’ miscommunication with investors was merely bad judgment or a criminal offense. Just as investors were surprised about AIG’s near collapse, so were their 100,000 employees. On Sept. 15, 2008 press surrounded AIG’s offices in lower Manhattan, just one block away from Wall Street. As Reuters reported from the scene, “Disbelief and anxiety were written on the faces of staff at American International Group Inc., as they grappled with the idea of their company, which was once the largest insurer in the world and one of the safest places to work, was struggling for its survival.” 39 To further complicate matters, because taxpayers now had a stake in AIG, media attention was all 37 Rogers Parloff. “Wall Street: It’s Payback Time.” Fortune. 19 Jan 2009. 38 Joseph Casanno quoted by David Voreacos and Elliot Blair Smith. “Cassano’s Statements on AIG Probed by Prosecutors, People Say.” Bloomberg. 26 Nov 2008. 39 Bob Margolis. “AIG Employees on Edge as Once-Safe Company in Turmoil.” Reuters. 15 Sept 2008. 23 the more intense. The controversy and anger surrounding the bailout made for sensational news which would continue long after the initial story died. In the midst of the financial turmoil, AIG was still a functioning company – in fact, many of its business units were running smoothly. This complex situation undoubtedly caused a great deal of stress, anger, resentment and fear among employees as they waited to hear the fate of their employer. While many were probably extremely relieved still have a job at AIG as a result of the bailout, the surviving company would certainly not be the same. The company’s reputation had been battered within the business community and the greater public, who had unwillingly become AIG’s primary stakeholders. Surely many employees were worried about losing their jobs as the company worked to regain its footing, yet working for such an unpopular institution surely takes its toll on the workforce. Hence retention was also a consideration for the company during this difficult time of transition. One of the most tangible pains for employees was their own financial investment in the company. Any stock options held by AIG’s workforce had been virtually wiped out and savings plans were questionable as well. On Sept. 23, CNBC acquired an internal memo to employees that stated, “AIG is not required by the Executive Plan to segregate deferred monies or purchase assets or place assets in trust for the purpose of satisfying AIG’s obligations under the Executive Plan. You will have no rights under the Executive Plan other than as an unsecured general creditor of AIG.” 40 In their video 40 AIG Memo to Employees from Charlie Gasparino. “AIG Memo To Employees.” CNBC. 23 Sept 2008. <http://www.cnbc.com/id/15840232?video=865156705&play=1> (2 Jan 2009.) 24 coverage, CNBC headlined the words “you will have no rights” throughout the segment. Given the internal unrest at AIG, this harshly constructed document sends a strong message to employees regarding their losses. While there is no positive way to tell people that they may lose their hard earned money, it was vital for AIG leadership to communicate that they value their workforce during this time. Instead, this memo treats employees like a distant business partner, referring to them as “an unsecured general creditor of AIG.” Not all reporters and pundits were concerned with reporting the employees’ hardships. On Oct. 16, Jim Cramer, host of CNBC’s “Mad Money” lashed out against AIG employees saying, “We should hound them in the supermarket, we should hound them in the ball park, we should hound them everywhere they are. We should make fun of them and we should point fingers at them and we should tell them that you have no shame.” 41 These inappropriate comments indicate the level of public frustration and anger at AIG that was easily misplaced on employees who had little or nothing to do with the company’s fall. To his credit, new CEO Edward Liddy sent Cramer a written request for an apology on behalf of his employees, which was also given to the Wall Street Journal’s Deal Journal blog. The letter read as follows: Those comments are outrageous. I demand they be retracted and that you apologize to AIG’s employees. It is one thing to criticize the executive leadership of AIG - that’s fair commentary. But it is way out of bounds to incite people to confront and harass other AIG employees - hard-working, dedicated people who are running good businesses and are committed to 41 Quote from “Mad Money” (CNBC; National) from Heidi N. Moore. “AIG CEO Demands Apology from Mad Money’s Jim Cramer.” 25 our success. The employees of AIG did not cause this mess, but they are paying for it - in diminished 401K savings and in some job losses as we sell companies to repay the Federal loan. The irony is that AIG employees did not cause the problem, but they will solve it. For that they deserve our praise and our gratitude. 42 Not only did Liddy demonstrate quality leadership by personally addressing these comments, but moreover, the letter’s tone was honest and sincere. Given the company’s history, this type of transparency from the top was exactly what AIG needed to begin rebuilding its tarnished reputation. As a new addition to AIG, Liddy was able to stand up for these employees in a credible and authentic way. While shareholders dominated discussion during the bailout, AIG leaders also had their policyholders to consider. Remarkably, despite AIG’s credit problems, its insurance units were still stable. However, with mainstream media focused on AIG’s fall, policyholders were bound to feel panicked, causing rumors to abound. A Washington Post reporter asked Robert Bland, chief executive of an insurance rating company, about policyholder sentiment. Bland stated, “For the consumer, this is very confusing…The level of angst is clearly the highest I have ever seen it. There’s no question there has been tremendous damage to the AIG brand, but going beyond the AIG brand I believe there is a new level of angst out there that is going to be with us for a while.” 43 To retain its customers through the firm’s transition, policyholders needed answers from AIG to 42 Deal Journal, Wall Street Journal <blog http://blogs.wsj.com/deals/2008/10/20/craaaaameerr-aig-ceo-challenges-cnbc-host-to- pistols-at-dawn/> (2 Jan 2009.) 43 Nancy Trejos. “State Insurance Officials Work to Calm AIG Policyholders.” Washington Post. 30 Sept 2008. 26 feel assured of the firm’s security. It was important that AIG leadership address this audience so that policyholders maintained their relationship with the company. In response, the company created a comprehensive web site for policyholders called the “AIG Answer Center.” 44 Headlining was the message, “You are protected. Your policies are safe. Be assured that our insurance companies remain strong and well- capitalized.” This one-stop resource for policyholders was an excellent communications tool for the firm to send a clear message to its policyholders about its stability in a branded way. The site contained a Q&A section to answer the many burning questions of policyholders and brokers, contact information for the company for live assistance, third party expert testimonials regarding AIG’s security and broadcast segments featuring new CEO Ed Liddy. The company also took a proactive approach to communication with its policyholders by sending them a letter, which was also available on the AIG web site. The letter, from Ed Liddy, read as follows: To our customers, agents, brokers, advisors and other partners: Thank you for sticking with us. All 116,000 AIG employees appreciate your confidence in us and are working tirelessly, with a renewed commitment to serving your needs. Be assured that our insurance companies remain strong and well capitalized. Regulations ensure that the assets of our insurance companies are there to back up each policy. You are protected. Your policies are safe. I’ll be communicating with you as we mold AIG into a strong, nimble and vital organization focused on exceeding your expectations and securing your future. 44 AIG, <http://www.aig.com/_385_122041.html?AFC-FromAIG.com> (2 Jan 2009). 27 Short and concise, this letter addresses the key concerns of policyholders and partners using a thoughtful and effective tone. Using this opportunity to thank AIG’s customers and partners was a very smart tack to acknowledge the stress experienced by its stakeholders without sinking into an apologetic tone that could be interpreted as weak. The statement also incorporates the key messages “You are protected. Your policies are safe.” These simple, direct statements of security are centrally located on the printed page and web site, demonstrate consistency in communication materials. While this may seem insignificant, it is vitally important for AIG to appear to its stakeholders as an organized, stable company, making cohesion and consistency of messaging tremendously important. The statement ends with a forward-looking sentence, indicating the company’s dedication to improvement but also, simply assuring customers that it will still be there. Furthermore, Liddy indicates his commitment to keeping its customers and partners informed about the company’s direction – opening the doors for communication in the future. The other audience of tremendous importance to AIG following the bailout was the general public. While much more difficult to communicate with directly, American taxpayers now had a stake in AIG’s success and held persuasive power over AIG’s lendors, politicians. With media attention focused on the firm, the pressure was on AIG to restore its tarnished reputation in the eyes of the public amidst the anger and controversy of the bailout. According to a Gallup poll conducted shortly after the bailout, Americans were almost evenly split on whether the federal government should have loaned money to 28 AIG. 45 This lack of consensus meant that a great deal of controversy could be, and was, played out in the media. Since AIG was in a media hotspot, it was important for AIG leadership to be extremely conscious of the implications of its actions and communications within the public sphere. While unfavorable media coverage not unlikely during this time, AIG leaders made some major mistakes that fueled the media’s fire, the first of which was its failure to pull advertising campaigns when the crisis began. An advertising campaign ironically titled, “Strength to Be There” ran over the tumultuous weekend prior to the bailout. There were headlines such as “AIG: ‘The Strength to Be There’ Uh-huh, yeah!,” 46 “AIG’s ‘strength’ tagline turns to punch line,” 47 “AIG commercials finally entertaining” 48 and “AIG: unwittingly funny ads” 49 filled the blogosphere, creating an embarrassing situation for the company that quickly spread to traditional media channels. Realizing their oversight, on Sept. 17, AIG officials pulled the ad and cancelled all corporate advertising through 2008. While better late than never, in many ways, the 45 Dennis Jacobe. “Americans Split on AIG Bailout.” The Gallup Poll Briefing. 19 Sept 2008. 46 Jason Bean. “AIG: ‘The Strength to Be There’ Uh-huh, yeah!” Uncover the Internet. 17 Sept 2008. < http://www.uncovertheinternet.com/aigthe-strength-to-be-there-uh-huh- yeah/> (2 Jan 2009). 47 David Griner. “AIG’s ‘strength’ tagline turns to punch line.” Ad Freak. 18 Sept 2008. <http://adweek.blogs.com/adfreak/2008/09/aigs-strength-t.html> (2 Jan 2009). 48 Tim Nudd. “AIG commercials finally entertaining.” Hollywood Reporter. 18 Sept 2008. 49 “AIG: unwittingly funny ads.” Bhatnaturally. 18 Sept 2008. <http://www.lbhat.com/brands/aig-irony-or-cruel-joke/> (2 Jan 2009). 29 damage had been done. Also, the advertising shutdown could not retract the direct mail piece that had already been sent to customers the following week. Sent to potential customers, the piece showcased a single sentence, “If disaster strikes, will you have the protection you need?” The postcard arrived just as bailout news was announced, amplifying the situation and driving more negative coverage. 50 Prominent blogger and recipient Jesse Kongos immediately took a picture of the postcard alongside a CNBC story titled, “AIG to Get $85 Billion Loan, Give Up 80% Stake” and posted it on his satirical blog. According to AdAge, the posting quickly hit the front page of digg.com, an online news aggregate service visited by 23.5 million unique visitors per month. 51 AIG’s next oversight was much worse, with executives departing on a lavish executive retreat less than a week after the bailout was announced. The luxurious getaway at the St. Regis Monarch Beach included $200,000 spent on hotel rooms, $150,000 for catered banquets and more than $24,000 at the hotel’s salon and spa. 52 At a House committee hearing, Rep. Henry A. Waxman (D – Calif.) displayed a photo of the retreat as he reported the expenses stating, “Less than a week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation…We will ask whether any of this makes sense.” Rep. Elijah E. 50 Beth Snyder Bulik. “AIG Pulls Flight of National Corporate Ads.” AdAge. 17 Sept 2008. 51 Quantcast report for Digg.com. <http://www.quantcast.com/digg.com> (2 Jan 2009). 52 Testimony from Rep, Elijah Cummings as quoted in “AIG execs went on $500K retreat within days of taxpayer bailout.” On Deadline, USA Today blog. 7 Oct 2008. 30 Cummings (D – Md.) also weighed in, “They were getting their manicures, their pedicures, massages, their facials while [the] American people were paying their bills.” 53 Media instantly latched on to the story and public outrage ensued. Headlines from major U.S. and world publications stated, “AIG spending at root of outrage; ‘They were getting facials, manicures, and massages, while the American people were footing the bill,” 54 “Will this greed on Wall St. ever end?” 55 and “AIG: Days after $85bn rescue, insurer host banquets.” 56 Not surprisingly, the incident topped the “top 10 PR blunders list” as compiled by Fineman PR 57 and was named on of the “biggest business debacles” of they year by Advertising Age. 58 In response, AIG issued a statement titled, “AIG Clarifies Agent Meeting,” in an attempt to explain the gathering. Quotes from Liddy expressed the company’s need to change spending procedures, “we owe our employees and the American people new standards and approaches.” He also assured that the company was “reevaluating the costs 53 Rep. Henry A. Waxman and Rep. Elijah E. Cummings quoted by Peter Whoriskey. “AIG Spa Trip Fuels Fury on Hill.” Washington Post. 8 Oct 2008. 54 Kim Dixon and Rachelle Younglai. “AIG spending at root of outrage; ‘They were getting facials, manicures, and massages, while the American people were footing the bill.” Reuters. 8 Oct 2008. 55 Helen Kennedy. “Will This Greed on Wall Street Ever End?” Daily News. 8 Oct 2008. 56 Andrew Clark. “AIG: Days after $85bn rescue, insurer hosted banquets.” The Guardian. 8 Oct 2008. 57 “Fineman PR; AIG, Detroit Thre, V.A. and Berkeley Featured Among Top 2008 PR Blunders.” Medicine & Law Weekly. 26 Dec 2008. 58 ‘Consumerist’s Biggest Business Debacles.” Advertising Age. 15 Dec 2008. 31 of all our operations in light of the new circumstances which we are all operating.” 59 The statement was of course necessary, yet the mistake had already been made and there was little to be done to minimize damage. It was now painfully clear that the company’s spending would be under a new level of public scrutiny. After controversy continued over executive payroll, AIG made a bold move to curb the negative media coverage. The company announced new restrictions on executive compensation, including a $1 base salary for CEO Ed Liddy in 2009. Liddy’s statement was as follows: We are extremely grateful for the assistance we have received, and we know we have an obligation to use that assistance to help AIG recover, contribute to the economy and repay taxpayers…This action by the senior management team demonstrates not only that we understand our obligation to taxpayers and shareholders, but also that we are committed to the future success of this organization. 60 As the Wall Street Journal points out in its coverage, Liddy would receive equity grant awards in addition to his $1 salary 61 , meaning that the move was largely symbolic. Even if only a media stunt, the announcement was successful in grabbing headlines and turning media coverage. Headlines of major U.S. and world newspapers read, “AIG freezes executive salaries; CEO gets $1,” “AIG Restricts Pay; Gives Liddy $1 in Salary” and 59 ‘AIG Clarifies Agent Meeting.” AIG Press Release. 8 Oct 2008. <http://www.aigwebcast.com/phoenix.zhtml?c=76115&p=irol- newsArticle&ID=1206974&highlight=> (2 Jan 2009). 60 “AIG Adopts Voluntary Executive Compensation Restrictions.” AIG Press Release. 25 Nov 2008. <http://www.aigwebcast.com/phoenix.zhtml?c=76115&p=irol- newsArticle&ID=1230022&highlight=> (2 Jan 2009). 61 Kerry E. Grace. “Crisis on Wall Street: AIG Says CEO Pay Will Be $1.” Wall Street Journal. 26 Nov 2008. 32 “AIG Says CEO Pay Will Be $1.” The announcement sent taxpayers a clear message – AIG leadership was serious about turning the company around, without the perks. Poor judgment from AIG’s leaders following the bailout caused public outrage. These mistakes not only tarnished the reputation of the firm, but made the difficult task of rebuilding the troubled institution even more arduous. It is the responsibility of communication officers to help leadership understand the implications of their actions and help prevent the widespread anger and resentment that was directed toward AIG. While Liddy’s communication has been on the mark since joining the firm, rebuilding the company’s reputation after such blunders will take time and require sensitivity and oversight, two important communications attributes that leaders previously dismissed. 33 Chapter 4: Washington Mutual and JPMorgan Chase A mere 10 days after Lehman’s bankruptcy came another striking development in the financial crisis. On Sept. 25, 2008 federal regulators seized Washington Mutual Inc., once the country’s largest savings and loan, marking the largest bank failure in American history. The Seattle-based thrift had survived economic hardships before, including the great depression, but like Lehman, the fallout of the subprime mortgage crisis proved to be more than the firm could handle. Washington Mutual, or WaMu, was an upstart bank created in 1889 to help the city of Seattle rebuild after a devastating fire destroyed many of the city’s downtown neighborhoods. Known for its ability to adapt to consumer and technological innovations, WaMu is credited with creating the first cash machine network and Pay-by- Phone banking network. Facing economic problems in the mid-90’s, the bank purchased the 158-branch American Savings Bank for $1.4 billion, doubling the size of WaMu. The thrift’s new strategy, guided by CEO Kerry K. Killinger, was to operate more like a retail store than a bank, putting customer service first at a time when many banks were cutting back on their branches. Killinger wanted WaMu’s services to be comparable to companies like Wal-Mart or Southwest Airlines, known for their value- driven, customer-centric business models. Catering to middle-class customers, WaMu’s central product was the home mortgage. Under Killinger’s leadership, WaMu quickly became the nation’s top bank in servicing mortgages. 62 62 Washington Mutual Inc. The New York Times Web site, <http://topics.nytimes.com/top/news/business/companies/washington_mutual_inc/index.h tml> (2 Jan 2009). 34 These mortgages accounted for a great deal of WaMu’s growth, but they also put the bank in an extremely vulnerable position as the subprime mortgage crisis began to unfold. In 2007, company shares lost over 50 percent of their value due to toxic loans. In response to staggering losses, in Dec. 2007 the company announced it would exit the subprime lending business, cut its dividend and reduce its workforce by 3,150 employees. 63 Yet, these changes proved to be too little too late for the firm as losses continue to grow. In April, the company received a large cash infusion from Texas- Pacific Group (TPG), a private equity firm, diluting shares but allowing the company to stay afloat. 64 While Killinger fought to keep WaMu alive, he remained out of favor among WaMu’s board and investors, many of whom blamed him for the firm’s problems, which continued to worsen. Over the course of the year, the firm had lost nearly 80 percent of its market value and as a result, Killinger lost his post as chairman of the board on June 2, 2008. While Killinger remained active as CEO, many shareholders and employees were calling for his ouster. 65 When the financial crisis came to a head in the fall, WaMu was still hurting. With increasing pressure from investors, the board decided to replace Killinger as CE0 on Sept. 7 to signal a fresh start for the troubled company, which analysts believed was in 63 Jad Mouawad. “Washington Mutual Cutting Divident and Jobs.” The New York Times. 11 Dec 2007. 64 Riley McDermid. “Washington Mutual rallies on report of cash infusion.” MarketWatch 7 April 2008. 65 Greg Morcroft. “WaMu’s Killinger loses chairman role, still is CEO.” MarketWatch. 2 June 2008. 35 the worst financial position of any major U.S. financial institution. 66 Along with WaMu’s announcement of new CEO Alan Fishman, the firm also revealed an agreement with the Office of Thrift Supervision (OTS), the company’s chief regulator, to help assure investors. While stock jumped early in the day, by market’s close, shares plunged to below $3 for the first time since 1991. 67 As stocks continued to linger around $2 a share, many analysts believed that the firm’s only hope for survival was to find a merger partner. Sure enough, The New York Times reported on Sept. 17 that Washington Mutual Inc. put itself up for sale after Standard and Poor’s cut its credit to a junk rating days earlier. 68 After talks with several firms, on Sept. 25 JPMorgan Chase (JPM), who had expressed interest in the firm earlier in the year, bought Washington Mutual for $1.9 billion from federal regulators, who seized the bank and then brokered the deal. Like Lehman Brothers’ demise and AIG’s bailout, the scale and complexity of Washington Mutual’s fold created many communication challenges. The firm struggled to regain investors’ confidence throughout the fall by making significant leadership changes while simultaneously courting potential partners and federal regulators. During these changes, maintaining productivity was crucial for the firm to remain functional – 66 Dan Fitzpatrick and Peter Lattman. “Washington Mutual Forces Out CEO.” The Wall Street Journal. 8 Sept 2008. 67 Quotes & Info. Yahoo! Finance. <http://finance.yahoo.com/q?s=WAMUQ.PK> (2 Jan 2009). 68 Geraldine Fabrikant. “Washington Mutual Is Said to Consider Sale.” The New York Times. 17 Sept 2008. 36 despite instability and the possibility of major layoff announcements. Additionally, as a consumer-facing bank, Washington Mutual had member retention to consider. In Washington Mutual’s final days, one of the board’s central business moves was replacing Killinger, the firm’s CEO of 18 years, with Alan Fishman, previously president and CEO of Sovereign Bank and Independence Community Bank. In this time of turmoil, introducing Fishman properly was integral for the firm to regain standing among the investment community, potential partners and government regulators. Fishman’s leadership would also be crucial to stabilizing the company internally. Clearly, the spotlight was on Fishman, and furthermore, the clock was already ticking. In WaMu’s announcement, Fishman was quoted as follows: WaMu’s strong brand and irreplaceable retail banking franchise have enormous potential, especially in today’s environment, and I am thrilled to have this opportunity to create value for shareholders. I look forward to working with WaMu’s dedicated management team and talented employees who have done a remarkable job of weathering the storm in housing and mortgage markets. I intend to hit the ground running here in Seattle with a focus on building WaMu’s strengths, addressing its weaknesses, and returning the company to profitability as quickly as possible. 69 This statement characterizes Fishman’s style – an optimistic manager who gives what BusinessWeek described as a “pep talk,” offering “some words of inspiration for the troops.” 70 His can-do attitude and intent to “hit to the ground running” was great 69 “Alan H. Fishman Joins Washington Mutual as Chief Executive Officer.” Washington Mutual Inc. News Release. 8 Sept 2008. 70 Christopher Palmeri. “Is Washington Mutual the Next to Fall?” BusinessWeek. 16 Sept 2008. 37 positioning for Fishman, but the question remained whether a new figurehead would be enough to curb opinions about the firm. Sure enough, despite Fishman’s enthusiasm, the investment community was not convinced that a turnaround by Fishman was realistic or even possible. As the Wall Street Journal reported: Analysts are skeptical that Mr. Fishman can come up with quick fixes to WaMu’s core problems…”The problem is very simple: They made a lot of bad loans,” said Richard Bove, banking analyst at Ladenburg Thalmann & Co. “The solution for their problem is to find some mechanism for reducing the bad loans. That can’t be done by a new CEO.” 71 While analysts doubted that this leadership change could turn the company around, Fishman himself was not criticized. In fact, analysts and media influencers largely agreed that Fishman was in a difficult position and “hitting the ground running” was his only possibility for success. Fishman himself emphasized that as a new CEO, he certainly did not have all the answers to WaMu’s problems. In an investor conference call to introduce Fishman, he stated: I am sure that many of you are interested in my perspective on the various issues WaMu is currently facing. Obviously having been the CEO for only a matter of hours, I am not in a position to respond to those questions yet. But I want to assure you that my style is to be open and transparent. Those of you that know me I think will acknowledge that. 72 71 Dan Fitzpatrick. “WaMu’s New Chief Prepares To Dive In Amid Skepticism.” Wall Street Journal. 9 Sept 2008. 72 Washington Mutual Inc. Conference Call Transcript. Wall Street Journal. 8 Sept 2008. <http://online.wsj.com/public/resources/documents/Transcript-WM-2008-09-08.pdf> (2 Jan 2009). 38 Communicating this commitment to transparency was a significant step for Fishman to build trust among the investment community, as well as his employees, many of whom were probably listening on this call or reading the transcript thereafter. It also sends a signal to government regulators that maintaining honest communication is important to him and the company as a whole. On Sept.11, 2008, the bank provided an early update on its performance by issuing a preliminary third quarter earnings announcement. In this statement, WaMu attempted to reassure investors, stating that, “the company expects its capital ratios at quarter-end to remain significantly above the levels for well-capitalized institutions and continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability.” 73 However, this announcement was countered by analysts’ red flags. Moments after the release, Moody’s rating service cut WaMu’s investment rating to junk, followed by downgrades made by Fitch Rating and Standard & Poor’s the next week. As stocks and ratings continued to drop, it became clear that WaMu’s efforts to restore investor confidence had failed. When JPMorgan Chase announced its purchase of the firm, investor fears were realized. “The big losers are WaMu shareholders, who are wiped out. On Thursday afternoon, before the deal was announced, WaMu’s stock price closed down $0.57 or 25 percent, to $1.69. Then, in after-hours trading, the shares 73 “WaMu Provides Update on Expectations for Third Quarter Performance.” Washington Mutual Inc. News Release. 11 Sept 2008. 39 lost another 73 percent, to $0.45. That’s down from $36.47 last October." 74 Describing shareholders’ anger, an investor relations professional for Washington Mutual explained in an interview with NPR that while people used to call to thank her, they now call everyday to say things she can’t say out loud. 75 While investors were inarguably at a loss, Washington Mutual’s employees remained integral to JPMorgan after the acquisition. To announce the news, an internal e-mail was sent to employees of both JPMorgan and Washington Mutual. CEO Jamie Dimon’s choice to send the same e-mail to JPMorgan and Washington Mutual employees is interesting. On the one hand, it indicates company leadership’s eagerness to unite the companies and provides a tangible first precedent of open communication between the two workforces. However, it also reads as inconsiderate of Washington Mutual employees, who undoubtedly feel differently than their JPMorgan counterparts about the deal. The e-mail, titled, “JPMorgan Chase combines with Washington Mutal – an exceptional opportunity,” begins by providing an explanation of the firm’s strategy behind the acquisition. These optimistic paragraphs emphasize camaraderie, thanking employees for all their contributions to the company that have led to its growth. In the e-mails closing paragraphs, Dimon addresses Washington Mutual employees, welcoming them to the company. This statement reads as follows: I also want to welcome the thousands of Washington Mutual employees who will be joining JPMorgan Chase. This has been a difficult and 74 Christopher Palmeri. “JPMorgan Chase to Buy Washington Mutual.” BusinessWeek. 26 Sept 2008. 75 Chana Joffe-Walt. “’WaMu Wake’ Lets Workers Mark End Of Era.” All Things Considered, National Public Radio. 8 Jan 2009. 40 stressful time for many of them. We should value and respect their efforts in building the company, and we look forward to working with them. We will be communicating with many of you over the coming days and weeks about next steps, new developments and opportunities. In the meantime, please don’t hesitate to speak with your manager if you have any questions or concerns. Thank you. 76 Dimon’s statement reads as considerate and thoughtful, acknowledging the difficult situation. Yet because this message is folded in to a celebratory message of the company’s acquisition, some authenticity is lost. While a bit insincere, this message successfully emphasizes leadership’s commitment to keep employees informed by answering questions and explaining changes. The e-mail included a Q&A section for Washington Mutual employees that followed Dimon’s message. Questions covered a range of issues from the simple, “how should I answer the phone?” to the more complex, “do you expect job eliminations? If so, when will those occur?” 77 Sending this to employees along with the announcement was an excellent approach because it is not only practical, but also acknowledges that employees have numerous questions and provides guidance and instruction to help prevent chaos in a time of transition. Layoff announcements for Washington Mutual employees came a couple months later. On Dec. 2, JP Morgan announced its plans to lay off 21 percent of the Washington Mutual workforce by the end of 2009. The layoffs would take place in stages, with 4,000 workers leaving the firm by the end of January and another 5,200 staying on throughout 76 Jamie Dimon. “JPMorgan Chase combines with Washington Mutual – an exceptional opportunity.” 25 Sept 2008. < http://forum.ml-implode.com/viewtopic.php?p=205272> (2 Jan 2009). 77 Ibid. 41 the year to help in the transition process. 78 Although waiting to announce layoffs created another media spike for the JPMorgan and Washington Mutual, it also allowed them to communicate the bad news in a more organized and effective way. Linda Kingman, a corporate communications expert, emphasizes the importance of communicating bad news as quickly and comprehensively as possible, as JPMorgan did. “If workforce reduction is necessary, encourage your leaders to think long-term and announce all the lay-offs at once, even if the departures are spread out over time. Better to take the painful action and then refocus the organization on the future as quickly as possible.” 79 This isolates media exposure to a shorter time period and also limits rumors and chaos internally. As the face of the company, building trust among Washington Mutual employees was vitally important for JPMorgan to maintain customer relationships as well. Washington Mutual was insured by the Federal Deposit Insurance Corporation (FDIC) meaning that all deposits of less than $100,000 were protected, but the bank had lost $16.7 billion in deposits since Sept. 15 due to intense media coverage and widespread doubt about the bank’s future. 80 This left JP Morgan with a significant communications challenge – building trust among Washington Mutual’s existing customers and attracting new deposits as well. Realizing the importance of customer support and experience, 78 Robin Sidel. “Crisis on Wall Street: Layoffs Coming to WaMu.” Wall Street Journal. 2 Dec 2008. 79 Linda Kingman. “Not Talking About It Won’t Make it Go Away.” In the Know. 1 Dec 2008. 80 Elinor Comlay and Jonathan Stempel. “WaMu is largest U.S. bank failure.” Reuters. 26 Sept. 2008. 42 JPMorgan indicated early on that it intended to retain front-line employees who have the most customer contact. 81 JPMorgan’s efforts to reassure customers began in the initial e-mail sent to employees. The Q&A section anticipated many of the most pressing questions that employees would surely answer in the coming days, including: How are customers’ accounts affected? What should I say to customers who ask if their money is safe? What do I tell customers about FDIC insurance coverage if they have deposit accounts in both banks? Can Washington Mutual customers bank at Chase, and vice versa? When do we officially become Chase? When do the signs change? When will our systems be consolidated? Will we be closing branches? What do I tell customers about that? Preparing employees to answer these questions early on was essential for JP Morgan to gain customer trust and prevent internal chaos – since these employees were be the ones responsible for easing customer apprehension. Keeping employees informed and preparing them for questions was certainly an important move to reassure customers. However, there was another major touch point that the company overlooked – their media planning. While an onslaught of carefully positioned advertisements aired in the coming days, immediately after Washington Mutual’s failure advertising continued as usual – creating an embarrassing situation for the company. Free checking ads touting the infamous “Woo-hoo!” tagline were running in many cases, immediately following stories about the bank’s massive failure. For instance, a story about people lining up at local branches to make sure their assets were secure was followed by an advertisement about how great it is to bank at Washington 81 Andrea Chang, E. Scott Reckard and Tiffany Hsu. “Financial System in Crisis: Will your bank be next?” Los Angeles Times. 27 Sept 2008. 43 Mutual. Furthermore, traffic and weather sponsorship units also aired in direct conjunction with stories about the bank’s troubles. As Mark Dominiak of Television Week explains, “Ordinarily, local news is an outstanding choice for any bank’s message. In this case, however, the bank’s being the lead news story, and a negative one at that, made the environment exactly the wrong one to be in.” 82 If Washington Mutual had a contingency plan for media, it certainly was not put into effect at the critical moment. Despite this initial flub, advertising did end up being one of the main vehicles of communication with consumers after the acquisition. The main message that JPMorgan wanted to send Washington Mutual customers was that nothing would change in terms of their personal accounts, but they could rest easy knowing they were now part of a stronger bank. Print, radio, online and fliers in banks were created that sent the simple message – “You’re O.K.” Advertising was created to be non-threatening and put customers at ease with the acquisition. For instance, one lighter Washington Mutual ad reads “We love Chase…And not just because they have a trillion dollars.” 83 Messaging was also displayed on both JP Morgan and Washington Mutual’s web sites to welcome Washington Mutual customers to the new company. Customer Q&A sections similar to those noted above were also incorporated on the web sites to help prevent confusion. Messaging also was designed to emphasize the security that the large bank could provide its customers. This not only reassured current customers who may be questioning the safety of their accounts, but also lured new customers who were worried 82 Mark Dominiak. “Manage the Crisis Before It Occurs.” TelevisionWeek. 6 Oct 2008. 83 Stuart Elliot. “Marketing Campaigns Aid to Soothe Clients When Banks Are Failing.” New York Times. 7 Oct 2008. 44 about the future of their own bank. According to financial crisis management expert Gary M. Stibel, messages “should tell people with money: ‘There is every reason to worry. That’s why we’re here.’” 84 Now the largest bank in the country, JPMorgan was able to take adavantage of this opportunity, hence their new tagline became, “WaMu & Chase. Safe & secure.” JPMorgan’s efforts proved largely successful in curbing deposit losses. In fact, deposits at Washington Mutual actually jumped 25 percent by the end of the third quarter. 85 Media coverage was also largely positive, reinforcing JPMorgan’s messaging. Major headlines included, “Chase; WaMu Customers Can Bank as Usual as Part of Bigger, Stronger Bank,” 86 “What’s Next for Failed WaMu’s Customers? Not Much Change at First as JPMorgan Takes Over” 87 and “With J.P Morgan, Many WaMu Customers Relax.” 88 Hence, JPMorgan’s communication initiatives were able to shift Washington Mutual’s negative media coverage to more positive stories that emphasized JPMorgan’s messaging. While the company still had significant of rebranding work 84 Andrea Chang, E. Scott Reckard and Tiffany Hsu. “Financial System in Crisis: Will your bank be next?” Los Angeles Times. 27 Sept 2008. 85 Kathy Chu and Sandra Block. “A costly crisis of confidence: When depositors lose faith, financial institutions lose out.” USA Today. 3 Nov 2008. 86 “Chase; WaMu Customers Can Bank as Usual as Part of Bigger, Stronger Bank.” Marketing Business Weekly. 19 Oct 2008. 87 Sandra Block. “What’s Next for Failed WaMu’s Customers? Not Much Change at First as JPMorgan Takes Over.” USA Today. 29 Sept 2008. 88 Roger Thurow, Nicholas Casey and Jim Carlton. “With J.P Morgan, Many WaMu Customers Relax.” Wall Street Journal. 27 Sept 2008. 45 ahead, these signs indicated that customers and media had responded well to the acquisition, paving the way for further alignment of the brands. 46 Chapter 5: Summing Up As established firms such as Lehman Brothers, AIG and Washington Mutual fall, the financial crisis has signaled a monumental breakdown of trust between financial institutions and their stakeholders. As Timothy S. Brown, APR , chair of PRSA’s Financial Communications Professional Interest Section, states, “Trust is at the bottom of all financial transactions, and for many investors and trading partners, that trust has been undermined.” 89 Edelman Public Relations recently released the results of its 2009 trust barometer survey. The findings showed the most dramatic plunge in trust in its 10-year history, with only 38 percent of those surveyed indicating that they trust business to do what is right – a 20 percent drop from last year’s findings. Furthermore, the study found that only 17 percent trusted the information that they get from a company’s CEO, showing an even more dramatic mistrust of company leadership. 90 Public relations practitioners must first face this trend and begin rebuilding this trust, a difficult task in such ominous times. Brown speaks to this challenge, stating that as the crisis continues, “financial communicators will continue to play a pivotal role in recontextualizing risk and rebuilding the trust of their organizations’ stakeholders.” 91 In a lecture given by AnnaMarie DeSalva, worldwide director of healthcare for Hill & Knowlton, Inc., titled, “Counseling to Build Trust,” DeSalva lists key steps that 89 Timothy S. Brown quoted in “Wall Street Woes: As the Financial Crisis Unfolds, Role of Communications as Important as Ever.” Public Relations Strategist. Fall 2008. 90 Richard Edelman. “How to restore trust in business.” Financial Times. 27 Jan 2008. 91 Timothy S. Brown quoted in “Wall Street Woes: As the Financial Crisis Unfolds, Role of Communications as Important as Ever.” Public Relations Strategist. Fall 2008. 47 communicators can take to counsel leadership to change, the first of which is building the case for trust among senior leadership. These difficult times provide an opportunity for communicators to convince leadership of the importance of building trust among their constituents. After building consensus among leadership, DeSalva stresses that trust must come from inside and out. This means engaging and aligning internal and external audiences around the organization’s business strategy and implementation. 92 Following this line of thought, each of the cases examined in this paper have emphasized the critical need to communicate with multiple audiences in crisis situations. Since each constituency has a differing set of priorities and interests, building consensus and understanding among various audiences can be extremely difficult. As companies are forced to change rapidly to survive, internal audiences are placed under a great deal of stress. Gary Grates, president and global managing director of Edelman’s Change and Employee Engagement Practice, explains that communicating with employees has become increasingly difficult in today’s fast-paced, global marketplace. According to Grates, the leadership works under ideals, propelling the company forward strategically, but employees are grounded in the company’s day-to-day realities. It is thus the role of communicators to fill this gap, yet as technology advances and old business models crumble, the gap between leadership and employees is widening. Grates posits that as a result of this increasing gap, “communications becomes about leadership counsel to make sure that leadership are doing the deed not just saying what 92 AnnaMarie DeSalva. “Counseling to Build Trust.” 6 Oct 2008. 48 they think.” 93 Leadership can no longer communicate in generalities; there is a need for authentic messages with clear intent. This certainly rings true in crisis situations, where leadership has an opportunity to bring clarity to employees in a time of chaos, thereby building trust. Yet, the speed with which events transpired at Lehman Brothers, AIG and Washington Mutual – a speed that characterizes the financial crisis – meant that leadership often was unable to provide clear answers to employees, not knowing this information themselves. This makes communication more difficult, but does not make it any less important. Sallie Gaines, senior vice president at Hill & Knowlton’s global response group provides the following recommendations: If you’re the CEO of a company that’s headed into uncertain economic territory, you may not know what you’re going to do because you may not understand the impact this financial situation will have on your company. But you need to do the hard task of communicating with [employees] now, even if you’re not sure what the shakeout is going to be. There’s not shortage of good data…when there’s a vacuum of information, rumor and speculation fill that vacuum. 94 Instead of waiting to have all the answers, it is important that leaders engage their employees in a candid and honest to prevent rumors and assuage tensions. While this paper has primarily focused on firms at the front lines of the financial crisis, the situation has caused widespread uncertainty in the business community as a whole, as many wonder who will be the next to fall in such volatile market conditions. A recent article from PR Week about the increasing need for internal communications as a 93 Gary Grates. “Change Management.” 29 Sept 2008. 94 Tonya Garcia. “Internal comms is key amid financial crisis.” PR Week. 3 Nov 2008. 49 result of the crisis explains that, “the free flow of information, coupled with the recessionary economy, has thrust many companies into a crisis communications situation. However, unlike a crisis that involves an individual company with a specific issue, this is a ‘global malaise’ that requires a different approach.” 95 The article quotes Mark Hass, CEO of Manning, Selvage & Lee, who recommends that even firms in solid financial standing “need to talk about what this means and what matters to employees.” 96 Having such a dialog serves many purposes. It lessens tension and uncertainty, prevents rumors from spreading, prepares the workforce for an uncertain future, helps bridge the leadership-to-employee gap and ultimately, helps foster trust. Since monetary exchanges are ultimately an exchange of trust, maintaining the confidence of investors has been of utmost importance to communicators during this financial crisis. As previously discussed, communications of Lehman Brothers, AIG and Washington Mutual with investors have fallen under intense scrutiny as regulators try to determine “who was just foolish with our money – and who was lying, cheating and stealing?” 97 The failures of leading companies such as these three have made investors highly skeptical as the market becomes more and more unpredictable. Financial communicators face thorny challenges as they attempt to maintain and rebuild trust in such dire economic times. Just as in employee communications, experts agree that uncertainty calls for more, not less, communication. Claire Koeneman, co- 95 Tonya Garcia. “Internal comms is key amid financial crisis.” PR Week. 3 Nov 2008. 96 Ibid. 97 Roger Parloff. “Wall Street: It’s Payback Time.” Fortune. 19 Jan 2009. 50 president of the Financial Relations Board, suggests frequent communication to make sure investors know what the company is doing to stay the course. This means using the months in between earnings announcements to provide a broader story for investors, building relationships and creating context. This could include state-of-the-business announcements to highlight positive differentiators to investors, hosting analyst days, participating in industry conferences and filling public speaking slots. Increasing visibility in these ways keeps investors involved and can lessen concerns about the company’s future. Yet again, honesty is central to investor communications during difficult times. The struggles of Lehman Brothers, AIG and Washington Mutual demonstrate that hiding problems will not make them go away, but merely exacerbate the situation. Koeneman stresses this point in her PR Week op-ed piece: Be straightforward. It isn’t easy to admit you are not perfect, but what was true in kindergarten is true today: Honesty is the best policy. Before the 2008 recession hit, certain companies opted for openness; they took their guard down before the market prompted them to do so. They were hammered for it at the time, but the decision has proved wise. They are in far better shape today than companies that continued whistling past the economic graveyard. 98 Although it is not the easiest course, communicators need to push leadership toward candid, transparent dialog with the investment community during difficult times. As the cases evaluated in this paper illustrate, financial news gained widespread interest outside of the financial community as a result of these extraordinary events. This changes a financial firm’s communications a great deal because complex financial issues 98 Claire Koeneman. “Prompting confidence with investors.” PR Week. 8 Dec 2008. 51 have become extremely relevant to American consumers. Policyholders at AIG might not understand the failures of the company’s CDs but they surely read front-page stories about the insurance giant’s failures. Similarly, most Washington Mutual account holders were not engaged in the intricacies of the subprime mortgage crisis but they pay much closer attention when it threatens their own account balances. Reassuring customers means explaining complicated business issues in ways that customers can understand. Anticipating customers’ needs and questions can help calm panic and, ultimately, maintain customer trust. Customer service employees must be ready to respond to difficult questions; help lines need to be activated; and, materials such as Q&As must be readily available in brick and mortar institutions and online. Since many of these firms fell at a remarkable speed, literally over a weekend’s time, these mechanisms must be ready at a moment’s notice, demonstrating the importance of advance crisis planning and preparation. Widespread anxiety among American consumers created difficult challenges even for those firms not facing serious financial problems. With headlines such as, “Financial system in crisis: Will your bank be next?” 99 filling newspapers across the country and forums beginning online such as one on the Washington Post Web site which encourages visitors to guess who will be the next to fall, customers needed reassurance from companies. Yet, as Dan Simon of PR News explains, “there is also opportunity to be found amid the crisis. The sheer levels of market uncertainty have left consumers crying 99 Andrea Chang, E. Scott Rechard, Tiffany Hsu. “Financial System in Crisis; Will your bank be next?” Los Angeles Times. 27 Sept 2008. 52 out for reliable information. Suddenly the intricacies of the financial services industry are of interest to a wider audience than ever before.” 100 An article in PR Week titled, “Solvent financial entities boost comms amid panic,” describes the steps that organizations took to comfort customers about their standing. Charles Schwab, for example, ramped up efforts considerably to assuage consumer doubts. Sarah Bulgatz, director of corporate PR for the firm, explains the company’s communications directive: Consumers in general are wondering what’s going on and what will happen next…People generally have a ton of questions so we’ve attempted to anticipate and answer some of them in a proactive way. Everything we’re doing is designed to try and help people put the situation in some perspective and make good investment decisions, not [ones] based on emotion. 101 Media relations activities landed a CEO profile piece in Portfolio, giving the leader a chance to discuss the financial crisis and encourage customers to keep investing. The firm also reworked its web site to become an informational resource for its visitors, leveraging Liz Ann Sonders, chief investment strategist, as a spokesperson to help consumers understand what current financial news means for them personally. Communicators at Charles Schwab also conducted local media relations activities, arranging interviews with branch managers and brokers in local media. 102 By increasing communications activities the company was not only reassuring its customers, but 100 Dan Simon. “Tip Sheet: Best of Times, Worst of Times: Mining Financial Communications When Crisis Are the Norm.” PR News. 24 Nov 2008. 101 Ted McKenna and Tonya Garcia. “Solvent financial entities boost comms amid panic.” PR Week. 29 Sept 2008. 102 Ibid. 53 actually using the crisis as an opportunity to become a trusted resource for anxious consumers. Observably, many of the tenets of crisis communication hold true across all these constituencies. Open, transparent, clear and authentic communications are crucial in times of crisis for all audiences. Conceivably, Lehman Brothers, AIG and Washington Mutual all had crisis plans in place that would have helped guide communications with key stakeholders. However, the unprecedented events that took place in each of these firms were largely unexpected, at least in terms of scale. Crisis plans are designed to anticipate situations that pose a significant risk and are likely to occur in organizations. As crisis communications professor Timothy Coombs explains, these firms were probably not adequately prepared to address such events because the risk of such extreme problems was relatively low. Furthermore, the scale of the of the situation overwhelmed communicators at these major firms, “even worse end scenarios didn’t prepare them for [what transpired].” 103 According to Coombs, the main challenge that communicators face in times of crisis is eliminating ambiguity. This became a significant issue for firms during the financial crisis because of the unpredictable nature of events. Company leadership was unable to tell anyone how to fix developing problems, because they were not sure themselves. This lack of direction further perpetuated problems because as ambiguity increases, rumors begin to spread. 103 Interview with Timothy Coombs. 26 Jan 2008. 54 Coombs stresses that the only way to cope with situations like these is communicating what you now, when you know it. Firms needed to be prepared to move as quickly as the situation developed. Yet because financial firms tend to be more conservative in nature, communicators had trouble reacting at the required pace. Overwhelmed by scale and speed, communicators were largely unable to unable to reduce ambiguity, decreasing the effectiveness of their crisis communications. The challenges that Lehman Brothers, AIG and Washington Mutual faced during these months illustrate the demands of modern crisis communication. For organizations to effectively respond at the speed demanded by the current media environment, intensive planning and preparation is required. Communication mechanisms must be in place and leadership must be trained to perform under intense pressure. Yet given the immediacy of news and information, communicators can no longer control messages as they have done in the past. Practitioners must encourage leadership to be flexible and open; ready to quickly adapt in volatile situations and prepared to share all available information, despite unknowns. These changes signal a new order of communications, in which the traditional fire-drill approaches to crisis response are no longer sufficient. 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Abstract (if available)

Abstract The financial crisis of 2008 exposed critical weaknesses in some of the world's largest corporations. As problems surfaced, company leadership was forced to answer to shareholders, employees, customers, government regulators and even American taxpayers. Communicators were tasked with providing difficult answers to these stakeholders in the midst of a rapidly changing media environment.

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The new ways of corporate communication in virtual environments: case studies of Second Life

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The impact of personality on corporate reputation: recovery from crises as a function of the degree of overlap between corporate and individual personalities

Asset Metadata

Creator Wickham, Joan (author)

Core Title The financial crisis: signaling a new order of communications

School Annenberg School for Communication

Degree Master of Arts

Degree Program Strategic Public Relations

Publication Date 05/05/2009

Defense Date 04/01/2009

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Communication,financial crisis,investor relations,OAI-PMH Harvest,Public Relations

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Floto, Jennifer D. (committee chair), Feldman, Robert C. (committee member), Wang, Jian (Jay) (committee member)

Creator Email jwickham@golinharris.com,wickham@usc.edu

Permanent Link (DOI) https://doi.org/10.25549/usctheses-m2185

Unique identifier UC1503167

Identifier etd-Wickham-2781 (filename),usctheses-m40 (legacy collection record id),usctheses-c127-237394 (legacy record id),usctheses-m2185 (legacy record id)

Legacy Identifier etd-Wickham-2781.pdf

Dmrecord 237394

Document Type Thesis

Rights Wickham, Joan

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Repository Name Libraries, University of Southern California

Repository Location Los Angeles, California

Repository Email cisadmin@lib.usc.edu