THE TALENTED MR. KADEN

A consummate insider who sleepwalked through Bethlehem Steel’s decline and smoothed the path for Lakshmi Mittal’s rise is now waist-deep in Citigroup’s financial mess.

© by Mark Reutter
Posted 5/4/09

Like Woody Allen’s Zelig, Lewis B. Kaden keeps popping up in the company of rich and important people.

An attorney by trade who has morphed into pivotal roles in banking (vice chairman of Citigroup) and steel (lead independent director of ArcelorMittal), Kaden is someone nobody has ever heard of – except those who inhabit the inner corridors of power in New York and Washington.

For the past 25 years, Kaden, now 67, has glided in and out of Manhattan boardrooms and I Street law offices, his visage discrete, his manner confident, his words soothing. His friends and affiliations range from sports (Fred Wilpon, owner of the New York Mets) to politics (New York Mayor Michael Bloomberg, former President Bill Clinton) to think tanks (Council on Foreign Relations, Century Foundation) to do-gooder groups (Human Rights First, Environmental Defense Fund) to billionaire businessmen and leaders of organized labor.

A onetime aide to Robert F. Kennedy, Kaden built his career as an idealistic civil-rights and labor lawyer before reversing course and settling in as a partner at Davis Polk & Wardwell. At this “Tiffany of law firms,” Kaden cultivated a role as strategist and advisor to CEOs and their boards of directors. He eventually caught the eye of Robert E. Rubin, co-chair of Goldman Sachs who would become President Clinton’s Treasury Secretary in 1995. It was Rubin who, returning to Wall Street to head Citigroup’s executive committee, asked Kaden to join the bank.

In September 2005, Kaden quit Davis Polk and accepted the twin posts of chief administrative officer and vice chairman of Citi, then the world’s largest financial services company with $2 trillion in assets. Although he had no previous banking experience, Kaden was placed in charge of units with more than 100,000 employees dispersed across 90 countries, including risk and compliance, operations and technology, government affairs, and mergers and acquisitions.

In a press release announcing the appointment, CEO Charles Prince praised “Lew’s deep experience, insight, and integrity” and said Kaden would become a member of Citi’s policy-setting Management Committee and Business Heads Committee, working alongside Prince and Rubin at Citi’s world headquarters at 399 Park Avenue. But until his name surfaced in regard to Citi’s agreement to pay $400 million to the Mets in return for naming the club’s new stadium after the bank, Kaden was conspicuously unexamined by the media.

New York Times sports columnist Richard Sandomir (who covered the issue better than his business-page colleagues) wondered how Kaden, representing Citi’s interests, could have been so sloppy as to “pay twice what any corporation in the U.S. had previously paid for naming rights.” More to the point, why did Kaden and Citi insist on honoring the deal when tens of thousands of Citi employees were being laid off and taxpayers were forced to bail out the bank with $45 billion in emergency aid?

By February 2009, several members of Congress, including Dennis Kucinich and Elijah Cummings, had denounced the agreement as a prime example of the cupidity and wanton excess of Wall Street. Wags suggested new names for the park, including Bailout Stadium and Debits Field. The Wall Street Journal detailed calls to rescind the deal on its front page.

Luckily, Kaden could bank on his critics’ short attention spans. Only two months after the hubbub, the Mets played their first regular season game at Citi Field, the righteous anger over naming rights having dissolved into yesterday’s news.

WIGGLE ROOM

Kaden’s ability to squeeze out of tight spots has been evident throughout his short Citi career.

In March 2006, Kaden was made interim president and CEO of Citi Alternative Investments (CAI), the bank’s hedge-fund arm that held about $60 billion in investments, $11 billion of which represented Citi’s own capital. Kaden was rarely seen at CAI’s offices on Lexington Avenue and spent most of his time searching for a successor. He finally settled on Vikram Pandit, an ex-Morgan Stanley banker who had formed a hedge fund named Old Partners. In April 2007, Pandit sold Old Partners to Citi for a mind-boggling $800 million and assumed the top post at CAI.

CAI’s portfolio of risky investments came crashing down after the worldwide banking crunch hit in late 2007. CAI actually stopped investors from withdrawing their money from one of its funds after panic selling knocked 30 per cent off the fund’s assets. By November 2008, Citigroup had been forced to close or rescue nine of its hedge funds. One fund, Corporate Special Opportunities, later returned only 3 cents on the dollar to investors, while Citi itself lost roughly $1 billion.

What’s more, in the 2005-07 period, Kaden was responsible for supervising the work of Senior Risk Officer David C. Bushnell. Pressured by senior management (including Prince and Rubin, according to the New York Times) to bulk up on subprime mortgages, Bushnell approved trading activities that led to billions of dollars of additional losses. But by taking advantage of regulatory loopholes, Citi used accounting maneuvers to hide these assets and keep the escalating losses off the bank’s books.

A handful of Citi executives (including Bushnell and Chief Bond Trader Thomas G. Maheras) resigned following these disastrous doings, but not Lew Kaden. He continued as vice chairman after Pandit replaced Prince as CEO in December 2007 and was closely involved in negotiations with federal regulators, including Timothy Geithner, now U.S. Treasury Secretary, in orchestrating a second $20 billion bailout last November.

Kaden is presently on the five-man Special Committee that oversees and approves how Citi makes use of the bailout funds (opens PDF, see Appendix A). Members of his ex-law firm, Davis Polk, are senior advisors to CEO Pandit. Bob Rubin, meanwhile, has retired from Citi and stepped down from the board of directors, making Kaden the last of the trio that once ran Citi.

Kaden’s staying power as a banker – he collected $4 million in bonuses in 2008 as Citi was collapsing – is matched by his longevity in steel. He was a key player at Bethlehem Steel when it imploded in 2001 as a director and member of the auditing committee.

Walking away unblemished from that disaster, Kaden returned to the steel industry in April 2005 as director of Mittal Steel, which by then owned Beth Steel’s former mills. Between 2005 and 2007, Kaden earned $423,000 sitting on the steel board, while Citi became a major underwriter of the company’s expansionist activities, acting as co-arranger of $22.6 billion in syndicated bank credit facilities. No wonder Kaden was named as ArcelorMittal’s lead independent director by CEO Lakshmi Mittal last April (2008).

THE YOUNG CRUSADER        

Lew Kaden likes to cite Robert Kennedy as his lifelong inspiration. “For all of us, we believed very deeply what Kennedy meant,” he said in a 2006 interview with The Wall Street Journal. He pointed to Kennedy’s desire to bridge differences between races, cultures, and classes.

As a Jewish kid growing up in Bruce Springsteen country, Kaden bridged a number of social chasms himself. He was born on March 24, 1942 in the Jersey shore town of Red Bank. His father owned a small trucking company and moved the family to blue-collar Perth Amboy. A superlative student, Kaden won a scholarship to Harvard University and graduated magna cum laude in 1963. After studying as the John Harvard Scholar at Cambridge University, he returned to Harvard for his law degree in 1967, again winning top academic honors and a position at the Harvard Law Review.

Briefly serving as an aide to New Jersey Senator Harrison A. Williams, Kaden elbowed his way onto the staff of Senator Kennedy. He joined Kennedy’s run for president as an advisor on manpower issues. He told the Journal that he was with Kennedy on the night he was assassinated, an event that radicalized the young lawyer.

After Kennedy’s death, he wrote a manual for civil-rights lawyers, participated in a city-planning project for poor residents of Washington, and co-authored a book with Theodore Kheel, the legendary labor mediator. Kheel asked him to join his law firm, and soon Kaden was immersed in problems ranging from a Teamster’s pay dispute to a confrontation between the militant Young Lords and a church in Jersey City.

A reporter for the Newark Star-Ledger was struck by young Kaden’s poise during the 1970 Newark teachers strike, writing:

Like an experienced handler of men inflamed by controversy, he glided in and out of board and union caucuses, lecturing men much his senior in age and experience about the necessity to keep order both in their utterances and in their positions… [He] provided the first bit of class the Newark school system had seen in a month.” (From Robert J. Braun’s Teachers and Power, 1972, pp. 205-6.)

Following an unsuccessful run for Congress in New Jersey as an anti-war candidate and a stint as chief counsel for New Jersey Governor Brendan Byrne, he joined the tenured ranks of Columbia University’s School of Law. There he began to reinvent himself. No longer advocating for the Young Lords in gritty Jersey City, Kaden cultivated ties to up-and-coming business lords in Manhattan.

Using Columbia’s Center for Law and Economic Studies as his platform, Kaden put together seminars on international trade and industrial competition that attracted bankers as well as eggheads. Returning to the political fold as a moderate Democrat, he established ties with other activist lawyers in New York as well as the swarms of Harvard alums who acted as aides, advisers, journalists, and lobbyists in Washington.

WHITE-SHOE LAWYER

For more than a century, Davis Polk & Wardwell has been the legal guardian of the fortunes of Wall Street. Dating back to the 1890s, when the firm claimed J. Pierpont Morgan as its client, the firm’s expertise in securities, business mortgages, incorporation, antitrust and taxation law smoothed the rise of the modern corporation as well as fostered a symbiotic attorney-client relationship with the present-day spinoffs of the House of Morgan, JP Morgan Chase and Morgan Stanley.

Accompanying its pioneering financial practices were antediluvian social customs and conservative politics. For years, the firm followed the tradition of hiring associates listed in the Social Register. Lead partner and namesake, John Davis, fought President Harry Truman’s nationalization of the steel industry in 1952, and two years later, representing the state of South Carolina, advocated the “separate but equal” doctrine before the U.S. Supreme Court in Brown v. Board of Education.

Kaden’s commitment to civil rights and Bobby Kennedy didn’t dissuade him from joining the firm in 1982. The meritocratic Jew from Perth Amboy assimilated quite easily into the “white-shoe” culture – so named for the time when partners wore white buckskin shoes in adherence to the accepted uniform at certain eastern prep schools. He was made a partner in 1984 and soon listed JP Morgan & Co., General Electric, Philip Morris, and Ford as his clients.

Kaden did not lawyer in the traditional sense of submitting briefs and deposing witnesses so much as to whisper advice to people like Jack Welch, head of GE, “on significant issues” (Kaden’s words). Still teaching at Columbia and casting himself as a disinterested scholar, he became an expert in corporate governance, a field that was gaining prominence as the cozy world of corporate boards gave way to litigation from stockholders and class-action lawyers.

To get a sense of the gems of wisdom that Kaden was imparting to the corporate world, here are his thoughts about the qualities required to be an effective board director (opens PDF), delivered in a 2006 speech:

I believe one of the hardest attributes for directors to perfect is understanding when to speak and when to be quiet. Some directors hurt their credibility by talking too much or making assertions in areas of the business that they may not fully understand. Others diminish their potential involvement by saying nothing, even when they could make a valuable contribution. It is important for directors to find the right balance and to express their views at the right moment and in the right context.

Kaden also kept his hand in labor and gained the attention of Lynn R. Williams, president of the United Steelworkers of America (USWA), when he served in 1987 as counsel to LTV, protesting the takeover and then return of some of the steelmaker’s pension plans by the federal Pension Benefit Guaranty Corp (PBGC).

For somewhat different reasons, LTV and the USWA stood on the same side of the issue. Their legal action was successful – full pension benefits were saved for retired and laid-off LTV steelworkers as the company reorganized itself in U.S. bankruptcy court. Williams then joined Kaden as a member of the Cuomo Commission on Competitiveness, a group that prepared public policy papers for the New York governor’s never-launched presidential bid in 1988. Kaden was named chairman of the Cuomo Commission and published a final report, America’s Agenda: Rebuilding Economic Strength, in 1992.

In 1993, Kaden joined the board of Bethlehem Steel as a representative of the USWA. He served on the board’s audit committee with Benjamin R. Civiletti, the attorney general under President Jimmy Carter.

Kaden first came to my attention during his tenure at Beth Steel. As far as I could determine, there was nothing to indicate that he did anything of substance on the board except to rubberstamp management’s boneheaded decisions. Perhaps he was too busy to learn about steel – and Beth’s failing place in same – due to his thriving practice of advising others about how to run their businesses.

He acknowledged his passivity on the Beth board in his 2006 interview with the WSJ. The article noted:

One particular disappointment, he [Kaden] says, was his inability as a director of struggling Bethlehem Steel Corp. to help figure out a solution to save the company from bankruptcy.

“Bethlehem had many strengths, even on the day it died,” Mr. Kaden said. The lesson, he says today, was that he and others relied too much on the simple hope that everything would eventually work out. “Everybody, including myself, would have benefited from being a little more hardheaded.”

But Kaden misspoke – he was, in fact, very hardheaded in using the federal bankruptcy process to terminate the health-care benefits of 95,000 retired Beth employees (white collar and union) and hand over the company’s production facilities to New York financier Wilbur Ross. In so doing, Kaden did not go against the wishes of the USWA.

In a cynical move, Leo Gerard, who succeeded Lynn Williams as USWA president, agreed to shed retiree health-care benefits in return for Ross’ pledge to operate the mills with an USWA-controlled workforce. Ross then turned around and sold the facilities, together with other steel mills picked up in bankruptcy court, to Lakshmi Mittal.

On the very day (April 15, 2005) that Mittal acquired Ross’ International Steel Group, guess who was appointed to the board of Mittal Steel? Yes, the talented Mr. Kaden.

HIP-HOP BANKER

The Cuomo Commission brought Kaden into contact with other luminaries, including John J. Sweeney, then president of the Service Employees International Union (SEIU) and now president of the AFL-CIO; Jeffrey E. Garten, managing director of The Blackstone Group and later dean of the Yale School of Management; Felix G. Rohatyn, senior partner and powerbroker at Lazard Frères; and, most notably, Bob Rubin of Goldman Sachs.

The cerebral Rubin had a natural affinity for the wonkish Kaden, an example of likes attracting. Four years Kaden’s senior, Rubin was born into a middle-class Jewish family, attended Harvard (graduating, like Kaden, magna cum laude), and was a lawyer at Cleary, Gottlieb, Steen & Hamilton before he joined the banking world. They shared a similar commitment to Democratic Party politics, brainy sessions on government policy, and mainstream philanthropy (the latter becoming Kaden’s proxy for his old social activism).

Rubin made his mark at Goldman Sachs mastering the high-reward, little-regulated world of risk arbitrage and, as President Clinton’s Treasury Secretary, wanted to “free” the financial markets from Depression-era restraints. The 1933 Glass-Steagall Act prohibited a company from acting as both an investment bank and a commercial bank, or as a bank and insurer. In 1998, Sandy Weill had created Citigroup by merging Citibank, the largest U.S. bank, with Travelers Group, a sprawling insurance and brokerage conglomerate. In 1999, the Gramm-Leach-Bailey Act tore down the wall between banking and insurance and let the Citi-Travelers merger stand. That same year Weill hired Rubin as senior advisor and director of Citigroup.

The world that Kaden entered in 2005 when he joined Rubin and Prince at 399 Park Avenue is hard to imagine today. All Wall Street banks were reporting record earnings and, while lagging behind its peers, Citi was making billions of dollars of profit. Replacing retiring Sandy Weill in 2003, Prince saw his main task as fixing Citi’s string of regulatory and public relations setbacks, ranging from its role in helping Enron hide its losses to biased research peddled by its former star analyst, Jack Grubman. In a slap to bottom-line-conscious Weill, Prince airily told the Wall Street Journal that he viewed Citigroup “not just as a profit-making business but as a ‘quasi-public institution.’ ”

Thus, Kaden was hired to settle various class-action suits, “address increased regulatory emphasis on corporate governance issues” (according to one release), and buff the bank’s public reputation as president of Citi Foundation, the company’s philanthropic arm.

Almost immediately, though, the Prince regime was rocked by unexpected challenges. Shortly before Kaden started, Robert Willumstad abruptly resigned as chief operating officer. This was followed by the departures of other senior bankers, accompanied by internal griping that Citi was being run by three process-obsessed lawyers (Prince, Kaden, and Rubin). 

Kaden stuck to the script. He pushed forward with a program to “drive necessary changes in the values, cultures, and practices” at Citi through a company-wide Shared Responsibilities and Five Point Plan. Sharing the philosophy of the program with listeners at the Edward Lane-Reticker Speaker Series at Boston University’s School of Law in 2006, Kaden said (opens PDF):

At Citi we have embedded our core values – what we call our Shared Responsibilities to our clients, to each other, and to our franchise – in our business. We are not only focused on what business we do – profits, revenue, and market share – but also how we do business according to these Shared Responsibilities. Thus, at Citi, we pay attention to corporate governance to limit risk and exposure, and also to enhance the way we are perceived by our different constituencies in over 100 countries around the world. For example, we want our employees to identify Citi as both a good employer and a respectable institution because we believe that it will enhance their view of their own jobs and thus their effectiveness.

Our desire to be viewed in this manner by our customers is what drives us to both invest so heavily in corporate governance and controls, and pay so much attention to corporate social responsibility and the values we want to represent.

It got to the point where Kaden was pontificating on shared values with Def Jam hip-hop artists and Phat Farm fashion guru Russell Simmons, while across town, Citi’s traders were running amuck, piling up risky positions unchecked by senior officers.

MONEY UNDER THE BRIDGE

In this climate, one can better understand how Citi and the Mets bonded over the new stadium. Citi profited by underwriting $600 million in city bonds for the new stadium, while Mets owner Wilpon reaped a guaranteed $20-million-a-year cash flow for 20 years through Citi’s naming rights.

Who better to negotiate the terms for Citi than its vice chairman who had represented Wilpon as a Davis Polk attorney during Wilpon’s contentious buyout of the team from his former partner, Nelson Doubleday? And didn’t the stadium fit Prince’s definition of a “quasi-public institution” with its planned educational museum dedicated to Jackie Robinson, the first African-American to play Major League baseball?

As an article describing the groundbreaking ceremony noted, “Prepared with shovels, inspirational words, and a name for their 21st century field of dreams, the Mets and a cast of dignitaries officially broke ground on their new stadium… Citi Field is expected to be known not only for its elaborate Ebbets Field rotunda, but also a steel bridge motif that represents the team’s connection to New York City, and a right-field porch that will hang eight feet over the playing field, like ballparks of yesteryear.”

Back in late 2006, when the stadium was begun and Citi stock traded at nearly $60 a share, the big question asked by the media was whether the Mets would be ready for Citi Field. Today, with $38 billion of losses under its metaphorical steel bridge and stock that closed at $2.97 on Friday, May 1, 2009, one wonders how long Citi and its current corps of executives will stay afloat.