GE Ousts Kidder Chief, Installs Its Own Execs : Brokerages: The troubled Wall Street firm’s parent moves to salvage its reputation in the wake of scandals.
Moving decisively to stem a collapse in the reputation and morale of Kidder, Peabody & Co., General Electric Co. on Wednesday ousted the troubled Wall Street brokerage’s chief executive and installed two top-level GE executives at the unit’s helm.
Out as Kidder’s chairman and CEO is Michael A. Carpenter, a close associate of GE Chairman John F. Welch, who installed Carpenter at Kidder shortly after its acquisition by GE in 1986.
GE, which bought Kidder for more than $600 million and has since pumped another $700 million in capital into the firm, made the change as the brokerage continues to reel from a scandal over phantom trades on its government securities desk and from questions about the health of its multibillion-dollar portfolio of complex mortgage-backed securities.
Those problems--and the attendant bad publicity--have provoked some Kidder customers to transfer their accounts to rival firms. Competitors also exploited Kidder’s weaknesses by trading against it and spreading damaging rumors, Welch said in a meeting with reporters.
“It was clear that every day the continuing barrage of stories was going to have an effect,” he said. “It was clear that unless something was done, it was going to cost us some money. There was an impression that there were more storms coming, there was a run on it, and it was going to get worse and worse.”
But Welch again denied persistent Wall Street speculation that the giant industrial and financial services company would like to unload Kidder. The management change, he insisted, is intended “to lay to rest any perceived issues about Kidder’s financial strength or our corporate support for the firm.”
The company said the British-born Carpenter, formerly an executive at the highly regarded GE Capital Corp., had resigned.
His duties will be assumed on an interim basis by Dennis D. Dammermann, 48, GE’s senior vice president and chief financial officer. GE also appointed Denis J. Nayden, 40, as Kidder’s president and chief operating officer.
Nayden, who gives up his post as executive vice president of GE Capital, is to move into Kidder’s top spot in three to five months, when Dammermann will return to the parent company in his old capacity. Dammermann will retain his existing titles at GE.
Welch was blunt in addressing Kidder employees Wednesday morning over the firm’s public address system: “We’re going to draw a line in the sand, dammit, and go forward.”
GE said Kidder expects to be “modestly profitable” in June but will lose $25 million to $30 million, after taxes, in the current quarter.
In New York Stock Exchange trading, GE closed down 37.5 cents at $45.75 as Wall Street sought to make sense of the changes.
“It’s really clear that the parent is totally committed to an ongoing Kidder Peabody,” said Nicholas P. Heymann, an analyst at NatWest Securities Corp. “Kidder will get all the attention, all the support, all the liquidity it needs. GE’s got its top guys in there.”
But not all Wall Street observers were entirely convinced that Welch intends to hold on to Kidder indefinitely.
“I think his strategy still is that when things get better, to sell Kidder,” said Perrin Long, head of equity research at First of Michigan Corp.
The brokerage firm’s most recent woes date back to April, when it was discovered that Joseph Jett, Kidder’s chief government bond trader, allegedly falsified bond trades to create $350 million in bogus profits. The maneuvers--which Jett allegedly undertook to boost his own performance-based pay--forced GE to take a $210-million charge against earnings.
Meanwhile, questions arose over the value of Kidder’s portfolio of exotic “collateralized mortgage obligations”--securities, backed by mortgage loans, whose market valuations crashed when interest rates broke sharply upward this year.
Welch and Dammermann said Wednesday that the brokerage firm holds about $10 billion in so-called CMOs, down from $16 billion at the end of March. According to Dammermann, the bulk of the remaining holdings are liquid and safe.
Straining to avoid blaming Carpenter for the problems, Welch said the longtime GE executive was forced to leave not because of any disappointment with his handling of the Jett and mortgage securities matters but because of their combined impact on the public’s perception of the firm.
“Either one of them alone he could have withstood,” Welch said. “What he couldn’t withstand was both of them.”
While Kidder overall has been profitable for GE--it earned $439 million last year--the brokerage firm has in some ways been an albatross to GE. Within months of the 1986 acquisition, the firm found itself at the center of the Ivan Boesky insider-trading scandal; its mergers chief, Martin A. Siegel, pleaded guilty to selling confidential information to Boesky and eventually served time in jail.
“We’ve had better return on other investments,” Welch said, “but this one isn’t a disaster.”
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Hiltzik reported from Los Angeles, Paltrow from New York. Times staff writer Greg Johnson in Orange County also contributed to this report.
