Dangerous CFOs, Imperial CEOs, Chagrined Bankers, and Warren Buffett

As an analyst and manager at Moody’s Investors Service, Don Noe met with many CEOs and CFOs to better understand their companies’ credit quality. He describes notable interactions in those meetings.

Companies produce massive amounts of financial information, and if that’s all you have, you can do a pretty good job analyzing credit risk. But it’s helpful to talk to senior managers, particularly when looking at a financial company or a company experiencing strategic change. It’s valuable to understand how a company’s executives think about their businesses beyond the numbers. Face-to-face meetings also provide the opportunity to assess company management. While I was a credit analyst and manager at Moody’s, I met with many CEOs and CFOs. Most meetings were routine and executives were good at explaining their company’s business and financial strategies. They almost always put their best foot forward. But the exceptions were notable.

There was an industrial company CFO who presented his plan to fund his company entirely with commercial paper because it would lower the firm’s interest expense and enhance profitability. But funding a company entirely with confidence-sensitive short-term debt would be disastrous if a financial hiccup occurred that prevented the company from rolling its commercial paper. Banks wouldn’t provide commercial paper back-up credit lines to such an extent, either. I stifled my original reaction, “Oh my god!” and managed to say a much blander “That gives us material concerns and could affect your company’s rating.” The CFO decided to continue terming out his company’s liabilities and balancing short-term and long-term funding.

The most revealing comment I ever heard in a meeting came from a savings and loan CEO during that industry’s crisis in the late 1980s. S&L holding companies had issued a lot of junk bonds and God knows what they did with the money. A lot of them were going under. During one meeting, this particular S&L CEO said, apropos of nothing, “I hope the feds never figure out what I’m doing.” His bankers looked like they were going to throw up. That was an example of an in-person meeting affecting our credit assessment. Another comment I’ll never forget came from a CEO who told me, “You are going to rot in hell” for how I was thinking about his company.

I met with a banker in the structured finance area who said he appreciated that it takes more analysis to come to a triple-A rating on a structured security than it does to come to a lower rating. To compensate for the extra work, he said he was willing to pay a higher rating fee for a triple-A rating. While there was some logic to his proposal, charging more for higher ratings wouldn’t instill investor confidence in our ratings. I told him we worked just as hard to come to a single-A decision as we did to come to a triple-A decision.

Meetings with the banks in Tokyo were tough. They were long with multiple executives reading from scripts and I was already fighting to stay awake because of jet lag. The worst was when one bank manager proudly announced they had specially prepared a “western meal” for me and my colleagues. Their idea of a meal I would enjoy was under-cooked pork. I didn’t want to be rude, but I also didn’t want to die from trichinosis. So, I cut up the pork, moved it around my plate, and hid it under my napkin. I headed off further problems like that by letting my hosts know I liked Japanese food.

The meetings with Japanese banks got tougher around 1989-90 when the banks experienced credit problems and we had to downgrade them from triple-A. They never seemed to understand that our credit ratings were not assessments of their moral quality as individuals. I felt sorry for the bank executives tasked to manage their banks’ relationship with us because there wasn’t anything they could do to prevent what their bosses seemed to view as a dishonor.

I met “very important CEOs” who came in to our New York office with multiple handlers: bankers, press people, and assistants. My first thought when I saw such a crowd was there must be something going on with the company I didn’t know about; something that required a lot of people to explain and made this meeting especially critical. But most of the time, the handlers were there to answer questions the CEO couldn’t or wouldn’t answer himself. When he kept referring questions to his underlings or bankers, I wondered, “does he know this stuff himself? Why can’t he answer questions about his company’s business or financial strategy?” (The CEO was almost always a “he” in the days I am recollecting.) It sent a signal that the CEO might not be entirely on top of things.

Sometimes, an “imperial” CEO adopted an attitude of arrogance. Maybe it was just the way they were, but at least sometimes I think the purpose was to discourage questions. By tone and body language, the executive seemed to be saying “I don’t appreciate you asking me these questions about my business.” Sometimes there would also be a “do you know who I am?” vibe going on, like that was supposed to get me to lay off. Or maybe they were trying to make me stop asking questions by getting across how stupid I was. Some executives would drop the names of the very important people they were seeing in New York. But the thing was, I had usually met the very same people whose names they were dropping. They had sat in the same chair he was sitting in and patiently answered my questions.

The worst case of self-importance was a regional bank CEO who insisted we meet him in his big suite at a fancy hotel and have breakfast. This was weird, and a member of his entourage tried to explain: “He needs anonymity while he is in New York.” I said, “Well, he’s got it. He works at a Midwest bank. Nobody here knows who he is.”

I did these meetings for years and felt like I’d seen it all. Then, one day, I met the antithesis of imperial CEOs and executives who have problems answering questions about their business. Warren Buffett and Charlie Munger from Berkshire Hathaway came in for a visit. They arrived in a taxi, not a limo, with no hangers-on, not one person with them at all. When I addressed him as “Mr. Buffett” he said, “Please call me Warren.” They had come in to talk about a debt issuance, and Buffett made a self-deprecating joke: “My mother always told me to avoid liquor, ladies, and leverage. I’ve avoided the first two, but sometimes I like a little leverage.” Our analyst, Weston Hicks, was an excellent insurance industry analyst and asked detailed and probing questions. Buffett and Munger spent an hour, an hour-and-a-half, giving very specific answers. When the meeting ended and we were walking to the elevators, Munger said to me, out of earshot of Weston, “Make sure you keep that analyst. He’s really good.”

Don Noe became senior managing director and co-head of Moody’s Investors Service before leaving the rating agency in 2001. He subsequently had senior credit risk positions at TD Securities and JP Morgan. Moody’s didn’t keep Weston Hicks. He held senior research positions at Sanford Bernstein and JP Morgan before joining Alleghany Corporation, eventually becoming its CEO.

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