Case Blog

Two weeks ago I wrote that while I start every week with an optimistic outlook that the worst of the credit crunch is behind us, I soon find myself disappointed by the “other shoe dropping.” Unfortunately, my fears were confirmed on that Friday, March 14th, when we learned that the venerable Bear Stearns (BSC) was suffering from a classic run on the bank and that many of its traditional trading partners were refusing to trade with them. We also learned that the Federal Reserve, under Ben Bernanke, working with Treasury Secretary Hank Paulson had developed a 30-day rescue plan with the assistance of Jamie Dimon and his team at JPMorgan Chase (JPM). We awoke on Monday, March 17th to find out that the 30 days had lasted a weekend and that Bear Stearns, which had closed at $30 on Friday, was now being sold to JPMorgan Chase for $2 per share. In effect, they were declared bankrupt and a threat to the confidence that was needed to restore the markets’ equilibrium.

As much as I do not like government bailouts, I believe that given the severity of the credit crunch globally and the lack of confidence we have experienced since August, the Fed made the right decision to save The Bear. I would like to add at this point that I feel the pain of the Bear Stearns employees, who owned more than 30% of the firm and saw their holdings virtually wiped out. When you compound this with how many of them will lose their jobs in this merger, you can empathize with their plight.

Unfortunately, much of the anger has been directed at Jamie Dimon and JPMorgan Chase for stealing The Bear. I sense that this anger should have been directed at Bear Stearns’ Chairman Jimmy Cayne, who until this summer was their CEO and had been for more than a decade, and Alan Schwartz, the current CEO. While they did tap Jimmy Cayne’s old friend Joe Lewis for additional capital last fall, it was a minuscule amount compared to what their counterparts at Citigroup (C) and Merrill Lynch (MER) raised during the same time period because of the collapse of the subprime mortgage market. There was Bear Stearns, with two of their hedge funds collapsing and daily stories in the Wall Street Journal about Jimmy Cayne being out of the office at bridge tournaments or on the golf course, while we were reassured by Alan Schwartz that this highly leveraged enterprise had adequate capital. Clearly both Cayne and Schwartz did not understand that the leverage that works wonders on the upside can kill you on the downside. Jimmy Cayne may have been an extraordinary trader in his day, but those days were in the past. One needs to know when to exit. Brett Favre’s retirement after an outstanding NFL season and career was in stark contrast to Jimmy Cayne’s hanging on.

I wrote in a blog, Confidence, on November 8th of 2007:

“The lesson for those of us in the media business is very clear: companies need leaders that know their business and have come up through the ranks. Leaders need to rise from the operating side of the business and understand the markets’ need for transparency. Unfortunately, the trappings of power help many leaders forget that their board represents the shareholders and other stakeholders in the firm and that surprises and failure to deliver on promises can only be tolerated for so long. Sandy Weill’s legacy would have been much better served if JPMorgan Chase’s CEO, Jamie Dimon, Weill’s original heir apparent, had succeeded him, as opposed to his corporate counsel, Chuck Prince.”

There is no experience that can replace that which is gained on the operations side of a business. Jamie Dimon and his team have now moved to calm the waters and have appropriately raised their $2 per share offer to $10 to insure shareholder approval. While the effects of the subprime debacle will continue to be felt for the near term, I am more confident today that with The Bear’s demise we touched bottom and with solid leadership from the Fed, the Treasury and the large money center banks, we will start to emerge from this very cold winter.

With the resignation of Eliot Spitzer two weeks ago, I started to reflect on why someone who has climbed the mountain would self-destruct in such a public manner. I decided that a professional could provide more insight than the news pundits and commentators, so I turned to a friend, Dr. Steven Berglas, who I recalled had written a book in the late ‘80s on this behavior, The Success Syndrome. What follows below is an interview I conducted with him. At the end of the interview, there is a brief biography of Dr. Berglas and a list of several of his other books and articles. I trust that you will derive as much value from his insights as I do.

Jim Casella: When you wrote The Success Syndrome in the late ‘80s, what research or clinical studies had you done up to that point?

Dr. Steven Berglas: Prior to writing The Success Syndrome, my appointment at Harvard Medical School’s McLean Hospital — the hospital featured in Girl Interrupted, A Beautiful Mind, and many other cultural icons — was as a Research Scientist. In my case that meant I had two five-year government grants to study the model of alcohol abuse I formulated for my Ph.D. dissertation. The model, called “self-handicapping alcohol abuse,” explains the appeal of alcohol to successful people who fear that they cannot live up to performances expectations derived from past successes. The model boils down to, “If I was successful but am now “under the influence” of alcohol, I can blame poor performances on Demon Rum and keep my self-esteem intact arguing, ‘as soon as I’m off the sauce I’ll perform like a star again.’ ”

Fortuitously, what happened because I was based at McLean Hospital (which at the time was the premier facility for the psychiatric care of VIPs) was that senior psychiatrists familiar with my research referred me a number of CEOs and other VIPs from Hollywood, government, and the world of sports who were not alcoholic but seemed to be “stressed by success.” Thus, while I was able to refine my self-handicapping model of alcohol abuse doing research as the resident “expert” on “successful people,” I broadened my understanding of why, irrespective of what symptoms they adopt, people stressed by success are responding to a common set of negative feelings.

JC: In the intervening 20 years, what, if anything, has changed?

SB: The biggest “change” that occurred since the publication of The Success Syndrome was in me: I realized that when I wrote the book I did not have an intimate knowledge of “life at the top.” I knew the conflicts of those who worked at “the top,” but I didn’t really have a sense of what their lives, particularly vis-à-vis colleagues and friends, was like. When you work intimately with people in situ, your empathic skills get honed in ways that are impossible to experience as a psychotherapist who must maintain an arm’s-length distance from clients. As a consultant and executive coach, roles that the publicity from The Success Syndrome enabled me to segue into, I acquired an intimate knowledge of the lives lived by those who suffered from success.

JC: Has the Internet made these self-destructive events, for example Eliot Spitzer’s, happen more in “real time”?

SB: I do not believe that the incidence and prevalence of self-destructive acts has increased owing to the role that the Internet now plays in the lives of Americans. I do, however, feel that our society is more intrusive in ways that can provoke those vulnerable to suffering The Success Syndrome to feel angered and defiant, feelings that often lead to The Success Syndrome emerging earlier in one’s life than it might otherwise have.

Any “force” militating against successful people feeling that they have 100% control over their life is a red flag to those who are successful. Because the Internet makes privacy less likely, many people vulnerable to suffering The Success Syndrome feel, “Damn the potential for detection; I’m free to do what I want…” This attitude was captured in a classic manner by the words Gary Hart, a prototypical victim of The Success Syndrome, used in response to a reporter from The New York Times one day prior to the end of his political career (which occurred when he was photographed on the boat Monkey Business with Donna Rice on his lap): “If you think I’m having an affair, put a tail on me.”

JC: Can interventions and therapy save someone before they self-destruct or do they need to do this first in order to be open to help?

SB: As every grandmother alive cautions; “An ounce of prevention is always better than a pound of cure.” That said, my entire executive coaching practice is based on “curing” The Success Syndrome. What I plan to do in the revision of this book is detail the steps organizations can take to provide “an ounce of prevention” for those vulnerable to The Success Syndrome before disaster strikes.

JC: When will your revision of The Success Syndrome be coming out? Most of us are truly perplexed by this fascinating and very complex syndrome and the behavior that you seem to understand and are able to explain very clearly.

SB: At the moment I am looking forward to having the book out by the Fall of 2008 if all goes well.

Dr. Steven Berglas Bio:

Dr. Steven Berglas (www.berglas.com) is an executive coach and management consultant who spent twenty-five years on the faculty of Harvard Medical School’s Department of Psychiatry where he also maintained a private psychotherapy practice in Boston prior to relocating to Los Angeles in 2000. From 1980-1985 he held a Career Scientist Development Award from the Alcohol, Drug Abuse, and Mental Health Administration.

Dr. Berglas’ seminal views on executive coaching appear in the lead article of the June 2002, edition of the Harvard Business Review. In his coaching practice, Dr. Berglas draws upon his training in behavioral- and psychodynamic psychiatry to design interventions that are uniquely suited to resolving the problems of A Players and C-level executives at risk for career burnout or the consequences of self-defeating (e.g. grandiose) behaviors. Berglas also works with corporations on executive selection; identifying job candidates resistant to “success depression” (the paradoxical suffering that follows major achievements) success-induced burnout, and self-destructive behavior such as white-collar crime.

Dr. Berglas has authored or co-authored four books that explain how the consequences of career success cause vocational, interpersonal, and psychological problems, including The Success Syndrome: Hitting Bottom When You Reach The Top (Plenum, 1986), Self-Handicapping (Plenum, 1991, Your Own Worst Enemy: Understanding The Paradox of Self-Defeating Behavior (Basic Books, 1993) and Reclaiming The Fire: How Successful People Overcome Burnout (Random House, 2001). Fortune Magazine honored Reclaiming the Fire by naming it one of the 75 Smartest Business Books ever written. Dr. Berglas has published numerous articles on the causes and cures of self-defeating behavior, the factors that cause executives to fail, and how to prevent white-collar crime, in The New York Times, The Boston Globe, and several major magazines. Dr. Berglas is a regular guest on talk shows including The Oprah Winfrey Show, 20/20, Dateline NBC, TODAY, Good Morning America, The CBS Evening News, and The Koppel Report, was profiled in Fortune, TIME, The Wall Street Journal, People and The Times of London.

Berglas’ clients range from Fortune100 CEOs, individuals listed on the Forbes 400, and billionaires who run privately held enterprises, to award-winning professional athletes, Grammy winners, Oscar winners, and internationally ranked chess Grandmasters.

Dr. Berglas holds a BA, cum laude, Phi Beta Kappa, with high honors in psychology from Clark University, a Ph.D. from Duke University, and he completed postdoctoral training in social psychiatry at Harvard Medical School.

Additional Readings:

Berglas, S. (2002). “The Very Real Dangers of Executive Coaching.” Harvard Business Review, June, pp. 86-92

Berglas, S. (2004). “Chronic Time Abuse.” Harvard Business Review, pp. 90-97.

Berglas, S. (2006). “How to Keep A Players Productive.” Harvard Business Review, September, pp. 104-112.

Since August the credit markets have been savaged by the subprime mortgage debacle. I start each week believing that the worst is behind us and that the moves by Fed Chairman Ben Bernanke and his counterparts around the world have calmed the markets and that most of the write-downs should have taken place, only to be surprised by the “other shoe dropping.” The Fed has moved again this morning and the stock markets have again reacted positively, but let’s see what develops over the next several weeks.

Late last week we found out that Carlyle Capital Corp., the troubled mortgage investment affiliate of the private equity firm Carlyle Group, which owns roughly 15% of Carlyle Capital, is not able to answer the margin calls from its banks and is asking for more time before the banks liquidate its collateral. Carlyle Capital finds itself in this situation because it managed to leverage $670M in investor funds into a portfolio of bonds worth approximately $21.7B. The leverage is a staggering 32X.

David Rubenstein and his partners built a solid reputation for Carlyle Group over the past 20 years on the road to becoming one of the largest global private equity firms. Can they allow this affiliate, publicly listed on the Amsterdam Exchange, to tarnish both its credibility and reputation? Will the partners raise more capital to hold off the lenders, who are now playing hardball?

As the credit crunch continues and the economy continues to slow down, will we see some more highly leveraged deals from ‘06 and ‘07 come under pressure? For example, Freescale Semiconductor (FSL), which was spun out of Motorola (MOT) and taken over by a consortium made up of The Blackstone Group, The Carlyle Group, Permira, and The Texas Pacific Group, is having a difficult time as Motorola’s cellular handset business continues to deteriorate and its demand for Freescale’s chips continues to soften. Is this another Delphi/General Motors (GM) story in the making: a former parent’s business declines and the orders to the former subsidiary decline as well? I sense that we will have to continue navigating these treacherous waters over the next several months and that each week will bring some more bad news and create further dislocation in the credit markets. This will make it difficult for larger media deals to take place, unless the acquirers are prepared to use significantly more equity than they have in the past or seller expectations start to adjust to these new market realities.

In spite of the turmoil in the financial markets, I continue to see interesting opportunities in the media market as we accelerate toward a digital future.

On the corporate battlefront, two high-profile contests are beginning to take shape. The battle between Barry Diller and John Malone has moved to the courts in Delaware. In many ways, the tangled web between IAC/InterActiveCorp (IACI) and Liberty Media Corp. (LINTA) is a remnant of the early days of the cable industry’s consolidation. I believe that they would have been wise to settle this latest feud prior to going to the Delaware Chancery Court. Perhaps they should have asked the two Michaels, Eisner and Ovitz, what their visit to the same court did for their reputations and careers. The time and money spent on this latest battle on whether to split up InterActiveCorp into multiple companies or take it private, as Malone has suggested, could have been better spent on forming a coherent advertising strategy for these businesses with Ask.com as the cornerstone. There are probably some lessons here as well for Yahoo (YHOO) and Microsoft (MSFT). As the options to keep Yahoo independent dwindle and Microsoft demonstrates patience by not raising its offer, it would seem that the time has come for Jerry Yang and his board to enter into serious negotiations with Steve Ballmer and Bill Gates.

Finally, I am writing this as we wait to see if Governor Spitzer of New York resigns. I could not help but think about “Hank” Greenberg, Jeffery Greenberg, and Dick Grasso, who were forced from their positions of power by Spitzer when he was attorney general, for supposed malfeasance, and have never been convicted (and in the case of the Greenbergs, never even indicted). It brought back to mind President Reagan’s former Labor Secretary, Ray Donovan, who after being acquitted on corruption charges relating to his former construction company inquired on his way out of court, “Which office do I go to to get my reputation back?”