By Thomas A. Heath
Wednesday, May 13, 2009
Back in the summer of 2008, the brain trust of Pepco Holdings would gather at 8:30 each morning and talk about how the power company should respond to the rapidly deteriorating financial markets.
President Joseph M. Rigby directed the meetings from a windowless room on the 10th floor of the company's Ninth Street headquarters in Northwest D.C. Around the conference table sat the giant utility's financial chiefs, the heads of its crucial power subsidiaries, its general counsel, and the public relations group. The vice president for human resources was there too, just in case layoffs or other personnel issues arose. More bigwigs listened in by speakerphone.
How the group responded offers insight into why some companies have fared better than others during these unpredictable times. As I talked with local business leaders throughout the region, I found they had much to teach about adapting to economic uncertainties.
And we've certainly been through some changes. Two years ago, I was writing about how Washington had become a major regional center for finance companies such as CapitalSource, Allied Capital and others. It now appears I was thinking too small, because Washington has become the seat of not just regional but national finance, what with the federal government's bailout of the U.S. banking industry and its move to seize control of mortgage finance giants Fannie Mae and Freddie Mac.
So I sounded out some of the leaders of this new Financial Capital.
"When Bear Stearns happened earlier in the year, our ears went up," Pepco's Rigby recalled during an interview. "We thought: 'What's happening here?' "
As the summer dragged on, Wall Street icons collapsed one by one -- Lehman Brothers, Merrill Lynch, AIG. Though Pepco wasn't in danger, Rigby and his team began to assume a worldwide, crushing economic event was headed this way.
"We were trying to push ourselves as to how bad this could get. It was important to remain uncomfortable," said Rigby, who has since been named chief executive. "We looked at things we can do in near, middle and long term."
"First in the near term was to take action and conserve cash. We had an immediate hiring freeze and a wage freeze. We also sent out a note to all leaders to look at the operating budget and remove discretionary costs -- non-emergency overtime, travel, training. In the middle term, we started to look at what projects could we delay without impacting customer reliability or services. And that relieved pressure. Probably the key thing we did was we took action that turned out to be prudent: We found a window of opportunity in early November of 2008, where we set a goal to do enough financing to get through 2009 without going to the capital markets. We raised approximately $1 billion in financing during three weeks in November of 2008, and went into 2009 with $1.5 billion in cash and credit available."
I called Raymond Roberts, co-founder of Citizant, a Chantilly-based company that manages computer tasks for the federal government, fully expecting Roberts to discuss how the economic blowup has smacked his company. I wrote a column about Citizant co-founder Alba Aleman about a year ago.
Roberts's response surprised me.
Business couldn't be better, he said. And he hasn't lost a wink of sleep.
It turns out that 10 years ago, in the midst of the dot-com boom, Citizant sought refuge and predictability in the government sector. Maybe it's a lower return than the private sector, but it consistently pays, and the government isn't going out of business (not yet, anyway).
I still wanted to know from Roberts if there were any lessons learned from this recession.
"The thing I have learned is that you have to have a long-term plan for your business. You cannot operate a business on the basis of a single event or series of events, whether it's Hurricane Katrina or an economic downturn," he said. "We are getting stimulus money not because we went after it but because we have longstanding relationships with our government clients. And they are coming to us."
Barbara Lang, president of the D.C. Chamber of Commerce, said her office published a research report in 2007 centered on the District's finances. It convinced her staff that the local economy could be getting wobbly.
"We didn't know it would be a tsunami, but we knew the economy was deteriorating."
Two years later, the chamber is seeking revenue in old and new places. The organization enlisted board members to prowl for new members, especially big businesses that pay fat membership fees.
"We went to our board members and asked them who they knew at certain companies and can you call them," said Lang. It has yielded some new members and more revenue.
The chamber also has gotten into businesses of its own. As of the end of 2008, the company became a licensed insurance broker, selling group life and health plans to local companies. Next is property and casualty insurance. Lang & Company are also in the concierge business. (I am being serious.) Want theater tickets? A spa reservation? How about your dog walked? It's all on the chamber's Web site.
I asked Lang what her takeaway (that's business school parlance for "lesson learned") was from this downturn.
"You have to be entrepreneurial," she said. "You have to constantly reinvent yourself."
Gloria Bohan, founder and chief executive of Fairfax-based Omega World Travel, one of the largest travel-management companies in the United States, has an almost fanatical obsession with keeping excess cash on hand, whether it's access to a line of credit or literally money in the bank. If you had to pay 800 employees every two weeks, you might like a nice cash cushion, too.
Bohan said that during this recession, Omega's costs have occasionally exceeded revenue, requiring the company to dip into reserves.
"I've always believed that cash is king," said Bohan, who has run the company for 37 years. "Cash management is probably the most important thing to running a business. Businesses should all have a line of credit with a bank. You don't want to be pulling your own cash to cover tough times. I want cash reserves to be able to tap into for a period of time to readjust."
Omega keeps three to four months' worth of cash on hand, which by my estimation is several million dollars at least. Last spring, however, Bohan noticed her bank, which she declined to name, was less responsive than usual.
"They were kind of quiet," Bohan said. "I was reading the Wall Street Journal and watching [the cable television business show] Squawk Box, and I put two and two together. I had a very, very strange feeling that things were turning bad, things were uncertain."
Bohan said she has been careful for decades, ever since President Jimmy Carter made what she called a disparaging remark about the travel industry. In the 1980s, a big travel agency with a government contract failed, which spooked some bankers.
To make her sleep better at night, Bohan has diversified the company a bit. It owns the office building where Omega is headquartered at Lee Highway and Route 50 in Fairfax County. It has the line of credit, and there is always the cash on hand.
"The one thing I look at every day is the bank balance," Bohan said. "If you are going to be impacted by this economy, you need to have time to adjust."
What about investors? What do they think, and how are they reacting to this crisis?
As a buy-and-hold investor and student of financial history, I believe capitalism will survive, and indeed thrive. What turns investors into "really wealthy investors" is remembering that the panic and turmoil of previous recessions eventually surrendered to a bull market.
I phoned investor Bob Torray, founder of the Torray Funds, a mutual fund. I know and like Torray. He is charismatic and has done well, with accoutrements of success like a nice office on the 11th floor of the Chevy Chase Bank Building in Bethesda. He started his investment firm in the teeth of the 1970s recession, so he has been seasoned by a few economic wars.
"When I started my company in January of 1973, the market went down every month for 21, 22, 23 months. I thought it would never stop. It was really a very scary period. We lost 10 percent in '73 and six percent in '74, and I was fully invested. The shares were so low by the time I got into them that we made 58 percent in 1975."
I asked him if he has behaved differently this time.
"We have just ridden this out," said Torray. That means he has held on to his holdings. But there are a few exceptions. "The changes we have made is to sell stocks in companies that seem to be so permanently impaired by the financial crisis that a meaningful recovery of them seems unlikely."
Torray wouldn't name the stocks, but he said several were based in the Washington area and were financial companies or companies closely tied to the credit markets. Outside of those, however, Torray has sat tight and held on to his stocks.
"We never trade, and we haven't this time," Torray said.
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