After peaking at nearly $70 a share three years ago, the once high-flying stock of Fifth Third Bancorp (FITB) has fallen to under $37 a share, its lowest level in five years. The slide has destroyed almost half the shareholder value of Fifth Third in the wake of its acquisition of our homegrown Old Kent Bank. Of course, financial carnage like that means someone has to go.
On Friday the Wall Street Journal reported that the fall guy was the newbie to the Fifth Third executive suite, Chief Financial Officer R. Mark Graf. The 40-year-old Graf was hired in only a year ago, but he’s been fingered for the collapse of Fifth Third’s stock. Well, the official story is that he’s quitting to pursue other opportunities. Yeah, right. But then the unofficial story is also a howler: Graf has to go because he downplayed to shareholders the bank’s recent bungling of the flattening yield curve. (That’s when short-term interest rates rise as long-term rates fall. This squeezes a bank’s profit margin because the cost of money goes up while the interest rates it charges on loans go down.)
The idea that Graf is responsible for the Fifth Third troubles is absurd. He’s been onboard only for a year, but the bank’s stock has been falling like a rock for three years. It’s no coincidence that the collapse began in April 2002 after we had reported to the U.S. Justice Department federal offenses that were committed during Fifth Third’s acquisition of Old Kent. By September 2002 the Federal Reserve Bank of Cleveland opened an investigation of Fifth Third. As a consequence the Fed imposed controls upon Fifth Third that stopped its merger mania strategy dead in its tracks.
Once Fifth Third was forced to grow through good management rather than buying up smaller banks with inflated stock, reality caught up with it. No longer able to run on water, its stock sunk while banks as a group outperformed the market. It is CEO George Schaeffer’s merger strategy that is a bust. He got greedy trying to get Old Kent on the cheap. (See Part IV of “The Fixer” series for more on this.) Instead he got a pile of overvalued and impaired assets that’s been an albatross around his neck ever since.
Graf’s resignation will only give Schaeffer a temporary respite, because nothing’s changed. Fifth Third’s fundamental problems remain, and it still has a potential $40 billion environmental liability hanging over it for concealing the Boardwalk’s contamination from regulators, shareholders, and its partner in financing the project, National City Community Development Corporation. Expect the Fifth Third stock to go even lower as its profits continue to slip and its liabilities catch up with Schaeffer and his team.