Paul Lego, Chairman & CEO, 1990-1993
Paul Lego knew he had a problem.
He had just gotten the bad news from his consultants. Their six-month investigation of Westinghouse Credit had uncovered $3 billion in bad loans, almost a quarter of the total outstanding.
But the new chairman had no idea how bad it was until he got a call Jan. 15, 1991, from Felix Rohatyn. The respected investment banker at Lazard Freres & Co., an adviser to Westinghouse, said they must meet immediately.
Rohatyn laid it out. The losses embedded in the financial services unit weren't the only issue.
Westinghouse also was experiencing a mini-run on its commercial paper -- the short-term IOU's big corporations with solid credit ratings issue to raise funds more cheaply than through a bank or bond house.
The investment community had grown skittish about commercial paper. There had been a handful of defaults the last two years, and there was a new federal rule restricting the amount of mid-level grade commercial paper that money-market funds, the biggest buyers of commercial paper, could own. And the buzz on "The Street" was that Westinghouse might be headed for a mid-level downgrade. It was better to get out now.
Westinghouse still had an unused $1.3 billion line of credit with its banks and could draw on that. But a credit crunch that had settled in about the same time Saddam Hussein's tanks crossed into Kuwait made it difficult to get more money quickly.
The corporation's sagging stock price also made the option of selling more stock problematic. And not only was the spigot for new commercial paper running dry, another run on Westinghouse's paper was possible.
In other words, Westinghouse had what the industry calls "a liquidity problem."
In layman's terms, it was running out of money.
Rohatyn told Lego: "If you don't do something fast, you'll go bankrupt."
Lego was flattened. But he knew what he had to do.
Westinghouse would have to restate 1990's record earnings of $1 billion to make room for a nearly $1 billion pretax charge-off to cover the bad loans. This would exhibit to everyone that the company was getting its financial house in order -- and, he hoped, let it pry more money from lenders and sell more stock to investors.
His plan called for taking a $975 million pretax charge against earnings --psychologically, $1 billion just sounded too high. The charge would cover write-downs of the shaky loans and expand reserves for future losses. Westinghouse also would raise at least $500 million from a common stock offering and would work to expand its credit line with its banks.
But no matter how it was painted, the picture wasn't pretty. Nineteen ninety would be the worst year for corporate profits at Westinghouse since 1979, the year that uranium lawsuit settlements wiped out earnings.
This was hardly the sort of news a chairman who's been in office just half a year wants to take to his board of directors.
Especially this board. It loved Lego's predecessor John Marous. Marous had delivered the goods. He also had treated board members well, taking them on trips and giving them expensive gifts, such as Waterford crystal vases, at Christmas.
Now here comes Lego, whose straightforward, rather cold and cautious demeanor contrasted sharply with Marous' outgoing, whatever-it-takes personna, telling them the good life Westinghouse had been living was a lie.
It would only confirm the reservations that Rene McPherson, the former Stanford University business school dean who joined the board in 1984, had about Lego in the first place, and would mark a rough start to a relationship between Lego and his directors that would only get worse. And these were his supposed allies.
The 60-year-old Lego had already dug a hole for himself in the investment community. It started the previous May, when Marous was still chairman.
There had been a scheduled briefing with securities analysts in Florida, and Lego had to step in because Marous was off on a final round-the-world tour. Marous told Lego it would be routine, just stick to the script.
But the meeting came just weeks after Standard & Poor's had lowered debt ratings a notch on Westinghouse Credit. Lego got hammered with questions. How big were the problems? Were there adequate reserves to cover losses? Why hadn't Westinghouse Credit been hit like the banks and thrifts?
Lego didn't know the answers. Financial services wasn't his responsibility; it answered to Marous. Sure, he sat on the subsidiary's board, along with Marous. He was familiar with the operations, but he didn't know the details.
And when he had raised questions -- as chairman of the PNC Bank board's loan investment committee, Lego saw the commercial real estate carnage first-hand -- William Powe, the head of the financial unit, would say Westinghouse was different, its portfolio of loans and customers was diverse and widely spread, and its team of lenders was more experienced.
The stumbling performance that early May day in Palm Beach bothered analysts.
It's not just that they were concerned about hidden problems at the financial unit. It was also that this soon-to-be head of a $12 billion conglomerate seemed ill-prepared. He was lackluster at what some viewed as his coming-out performance.
Investors dumped Westinghouse stock -- it fell $2 that day. Marous called the next day from Amsterdam. "What the hell did you do?" he demanded. Lego insisted he didn't do anything. He just didn't know what was going on at the financial services and credit units, and that didn't sit well with his inquisitors.
Lego wanted to make sure that he was not surprised again. After becoming chairman a few months later, he hired Lazard Freres and Lehman Bros. to sift through the finance unit to find the skeletons.
The only problem was that the advisers' work wouldn't be finished in time for Lego's next analysts meeting, in Manhattan in late October. It would be his first as chairman, and would represent his true coming-out party.
He knew enough to say the finance unit would stop making new loans and start weeding out bad ones. But he gave no hint of a large write-down. Instead, Lego focused on plans for the rest of Westinghouse's businesses, most of which were confronting a budding recession, reduced government spending and regulatory turmoil.
Analysts appeared receptive. Then, the $975 million bomb was dropped. Lego's credibility was shot.
The irony was rich. The son of a Johns-town steelworker, Lego always had been a straight-shooter. He could be honest to a fault, and brooked little bull from his staff -- or superiors. He was disciplined and organized, rising at 4 every workday to get in his five-mile run and still be in the office by 7. Yet the message Wall Street was getting was muddled if not misleading. The image it was forming was of a weak manager.
Lego was even beginning to have a credibility problem with his workers.
In early March 1991, he held an all-employee meeting at the Pittsburgh Hilton and Towers Downtown and soberly described the company's predicament. It was a we're-all-in-this-together environment. Afterward, a group of workers suggested a 10 percent across-the-board pay cut for management. Lego nixed the idea, saying next year's year-end bonuses were already slated to be eliminated.
That didn't sit well with the group, particularly since Lego, Marous and the rest of top management already had said they would keep their 1990 performance bonuses -- awarded before the record profits were drastically restated. Lego alone got a 20 percent jump in pay, to $1.68 million. "People in my level were saying, 'Those bastards, they don't get it'" recalls a middle manager.
Never mind that the executive payouts were just blips on the total payroll, or that Lego had been in the dark about financial services. The decision to keep the bonuses and forestall an immediate pay cut sent a message that was becoming increasingly common at Westinghouse -- management takes care of itself. And it destroyed a lot of goodwill.
It might not have been so bad if the $975 million charge had taken care of everything. And from Powe's perspective, it had. He was telling anyone who'd listen that even $600 million would have been too much. But it was soon clear that Powe's optimism was misplaced. During that spring, he was supposed to be selling troubled properties. But by mid-summer, he'd barely sold a thing. Potential buyers were avoiding real estate like the plague.
Concerned there still was no accountability at the finance unit, and convinced from his own review that the situation was worsening, Laurence Chapman, the chief financial officer at Westinghouse Credit, submitted his resignation. He couldn't in good conscience put his name on regulatory filings he felt -- knew -- contained false information. It was August 1991.
Warren Hollinshead, the parent company's chief financial officer, convinced Chapman to stay on while Lego reviewed his findings. It didn't take long for Lego to fire Powe. He brought back Leo Yochum, the former Westinghouse CFO, as Powe's replacement -- for $800,000 a year and $80,000 a month, a price several insiders felt was steep.
Lower-level employees would become only more incensed when it was disclosed two years later that Robert Watson, a former GE executive hired by Yochum to dispose of the finance unit's assets, earned a whopping $14.4 million for just 18 months work. It was just another case of management watching out for its own.
Once Yochum arrived in October 1991, the workout began in earnest. Over the next 13 months, Westinghouse would get rid of $7.6 billion of assets and take an additional $4.8 billion in charges. That brought the total losses to $5.8 billion, almost half the $13 billion in loans that financial services had booked before it stopped making them at the end of 1990.
As bad as many of the loans were -- local examples of estimated losses ranged from $100 million in Phar-Mor, $40 million in Cherrington Corporate Center in Moon, $22.5 million in the Warner Center, Downtown, and $9 million in the former Bourse Shops in Scott -- a more obscure item did the most damage.
To wrap up deals and obtain hefty fees, the finance unit made hundreds of loan guarantees and other "off-balance-sheet" commitments. Off-balance-sheet commitments are just that -- they aren't reported as an actual liability on the balance sheet unless they are used. They are the equivalent of a parent who co-signs a daughter's car loan. If she can't make the payment, the parent must.
Westinghouse Credit acted as the co-signer on $3.8 billion of loans and financing arrangements from the mid-1980s through 1990. Virtually every one of them was called. The enormity of the problem wasn't discovered until 1990, when an accounting law change expanded reporting requirements for off-balance-sheet commitments. And because of the support agreement signed by Marous in May 1990 stating that the parent company would repay any debts and cover any losses at the financial services subsidiary, Westinghouse was on the hook for them all.
It might not have been so bad if the rest of Westinghouse had been zipping along. But Lego couldn't catch a break.
As luck would have it, the recession had cut into both advertising profits in the broadcasting business and equipment sales in the industries group. The environmental group was confronting delays and cost overruns in its waste-to-energy business, as environmentalists protested the potentially harmful effects of waste incineration. And federal budget cuts were starting to trim the earnings of its defense businesses.
At home, Westinghouse lawyers were busy responding to a rash of lawsuits from utilities over corroding pipes in power plants. And to top it all off, Westinghouse was embroiled in a high-profile legal case alleging bribery in the awarding of a nuclear plant contract in the Philippines.
A dark cloud settled over headquarters. Morale was shot, and the always rich Westinghouse rumor and gossip pipeline was overflowing.
In his 33 years at Westinghouse, Lego had been given the hard tasks, the troubled divisions, and had succeeded in turning them around. The lamps division. The semiconductor division. The distribution controls division. It wasn't fair that just as he got his shot at running the entire show, he should be consumed by a mess he didn't create, a mess left by Marous. John got to ride out on a high, and here he was, sinking in quicksand.
He began turning increasingly to his friends -- Eileen and Anthony Massaro -- for support and guidance. He had known Tony Massaro for years. He was Lego's executive assistant when Lego was first named a vice president. The two owned an Italian winery together, and Tony had always served as Lego's sounding board. Eileen, the highest-ranking woman in Westinghouse as head of corporate relations, simply made Lego feel better.
Together, the three began to be viewed by the rest of the management staff as an impenetrable cocoon, with Eileen controlling access to Lego, and Tony, the head of environmental operations, appearing to help choose assignments.
Eileen Massaro and Lego were becoming inseparable. She traveled everywhere with him, as would be expected from someone handling corporate communications. But it made some managers feel uneasy, feelings they had as early as October 1989, when Lego and Eileen Massaro showed up wearing matching golf outfits at a company conference and outing in Morgantown. "In a top job, you can't have a friend," Lego laments.
A hunkered-down mentality began to permeate the 23rd floor at Gateway Center headquarters. Lego withdrew into his office. "He would rather shut the door and read Harvard Business Review," said an upper management ally. Distrust grew. Heated outbursts were common at senior management meetings.
There were no easy fixes. Westinghouse simply didn't have the money to do things Lego wanted to do. He was interested in Gaylord Entertainment's popular Nashville Network and Country Music Television cable channels (which Westinghouse ultimately acquired under Jordan). And, in the rapidly consolidating defense industry, he knew Westinghouse had to be a buyer, or lose market share.
It was clear to him that one or several of its businesses would have to be sold to raise cash. That rankled some senior executives. There was a faction that favored toughing it out, but even that was rapidly becoming a non-option.
Westinghouse was quickly eating through a $6 billion line of credit arranged with lenders in late 1991. It already had dipped into the stock market twice, in the spring of 1991 and 1992, to raise $1 billion to pay down debt. And its deteriorating credit ratings -- they'd fall to junk-bond status by early 1994 -- precluded the issuing of more debt.
If only Lego could get Westinghouse out of the financial services fix. Twice deals were in the works with General Electric to take over the bulk of the subsidiary, and twice the deals collapsed.
The first came in late 1991. GE would buy $1 billion of the financial unit's loans at book value and the rest at stratified prices. It also would lend Westinghouse $3 billion.
But when Gary Wendt, the head of GE Capital, the conglomerate's huge financial arm, met with Yochum, Hollinshead and a few others, he came across as an arrogant SOB. It wasn't just GE cherry-picking the best loans and leaving the dogs behind; Wendt acted as if GE were coming to save Westinghouse from itself.
Lego still wanted to do the deal. But when his six-member management committee met, he was outvoted, 5-to-1. One of the hardest things he had to do as chairman was to call GE's Jack Welch to say, "No."
The second time came exactly a year later, in November 1992. There was again a lot of pressure to do something, and do it quickly.
But if the first deal with GE was bad, the second one stunk. Not only would it pick out and keep only the best loans and properties, but GE also planned to stick Westinghouse with any unforeseen environmental and legal entanglements.
Lego was firmly against it, despite pressure from his directors. "He showed real integrity," says Hollinshead. "He knew he was putting his head in the mouth of the lion."
The board went ballistic. Shareholder rights groups and pension funds, who had long ago turned on Lego, were now demanding his head.
Even though he came up with a survival plan that his successor would embrace -- shedding its electric supply, distribution and controls, office furniture and land development businesses -- Lego's fate was sealed.
Publicly, the board was issuing statements in support of Lego. Privately, it was deciding he had to go.
In January 1993, Lego would be gone, temporarily replaced by longtime Westinghouse executive Gary Clark.
The search was on for a new -- and ,as fate would have it, the last -- Westinghouse chairman.