What does Delaney’s resignation from CapitalSource mean for the company?


Democratic congressional candidate for Maryland's 6th district, John Delaney helps a woman in her car near a polling station during a primary election in Frederick, Md., on Tuesday. (Luis M. Alvarez/AP)
April 8, 2012

Winning the Democratic nomination for Maryland’s 6th Congressional District last week convinced John Delaney it was time to make a bittersweet decision: resign as executive chairman of the commercial finance company he founded, CapitalSource.

Delaney had been every bit the hands-on manager in building his Chevy Chase business over the years, and now he says it is time to devote that same energy to getting elected.

His shift comes at a critical time for the company. CapitalSource, founded in 2000, quickly became a rising star in Washington’s financial industry by being an aggressive lender to mid-size companies.

The firm, though, fell on hard times during the recent downturn as the companies it lent to struggled to repay loans and as real estate values tumbled.

Other lenders went out of business or consolidated. But Delaney found safety by turning his firm into a bank. He orchestrated the 2008 acquisition of California thrift Fremont Investment & Loan, a deal that allowed CapitalSource to fund its operations with dependable bank deposits.

The move won plaudits on Wall Street, but the work is not over. CapitalSource is still shedding past loans and returning capital to shareholders on the road to becoming a bank holding company now known as CapitalSource Bank. The company has lost money in the process. It reported a net loss of $52 million in 2011, half of the net loss recorded in 2010.

Delaney, who remains chairman of the board, will have no role in the daily operations of CapitalSource. At the start of the year, he had taken a leave of absence without pay to run for office. Delaney could have maintained that status through the general election in November but said he didn’t want his campaign “to be a distraction for CapitalSource.”

Shares of CapitalSource slid nearly 2 percent, to $6.53, on Wednesday when Delaney announced his resignation. Analyst Jeff K. Davis of Guggenheim Securities chalked the performance up to the markets being soft last week.

“John is no longer an officer, but he has a very capable team around him that have been instrumental in building CapitalSource from the get-go, including Jim [Pie­czyn­ski], the CEO,” Davis said.

Delaney said the transition has been years in the making. Back in 2009, he handed his chief executive duties to Pieczynski and Steve Museles after the $860 million sale of CapitalSource’s nursing home business to Omega Healthcare Investors. Museles stepped down this past November, leaving Pieczynski at the helm, as the company consolidated the ranks in its ongoing transition.

“One of the reasons I moved into the executive chairman position and stepped back as CEO is so I could think about public service,” Delaney said. “I wanted to make the transition very gradual, as opposed to abrupt, which I think we where able to do.”

Delaney has other business interests beyond CapitalSource.

He teamed with Lee Sachs, a former adviser to Treasury Secretary Timothy F. Geithner, to form an asset-management firm, Chevy Chase-based Alliance Partners, in January 2011. The firm was created in part to advise BancAlliance, a cooperative for community banks seeking to make larger loans. Delaney has an advisory role in Alliance Partners.

In June, Delaney joined the board of Bethesda-based Congressional Bank, after acquiring a $5.3 million stake in its holding company Congressional Bancshares. Around the same time, Delaney also helped found BluePrint Maryland, a nonprofit focused on making the state more economically competitive.

Come November, if Delaney is elected, his involvement in some of these endeavors may change. Members of Congress can be stockholders and serve on boards of nonprofits and corporations without pay, according to congressional ethics rules.

“There is the code of ethics, and then there’s the right thing to do,” said James Thurber, a professor of political science at American University. “Members of Congress should resign from for-profit boards they belong to because of the perception and actual conflict of interest that could occur.”

Delaney declined to comment on future plans to remain on the boards of CapitalSource or Congressional Bank.

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