Richard Kovacevich: Seeing the half-full glass in the U.S. economy

It's understandable that some economic forecasters, spooked by gloomy indicators, say the U.S. is heading into or already in a recession — but they may be overlooking key factors that buffer negative forces, according to Richard Kovacevich, chairman of Wells Fargo & Co. Kovacevich is this year's winner of the W. P. Carey School's Executive of the Year award.

It's understandable that some economic forecasters, spooked by gloomy indicators, say the U.S. is heading into or already in a recession — but they may be overlooking key factors that buffer negative forces, according to Richard Kovacevich, chairman of Wells Fargo & Co. Yes, Kovacevich said, retail sales are weak; housing is in the dumps, with many subprime mortgages defaulting; oil is around $105 a barrel and we could see gas rise to $4 a gallon.

Kovacevich, recipient of the W. P. Carey School's 25th Annual Executive of the Year award, addressed business leaders at the award luncheon recently. On the other hand, he said, exports are growing at about 13.6 percent annually, adding 1 percent to the gross domestic product, offsetting the decline rooted in the housing and automobile segments.

Unemployment is relatively the same, he continued, and the Federal Reserve has cut interest rates by 225 basis points, with another 50 basis point reduction likely later this month. Kovacevich, an industrial engineer who earned a master of business administration at Stanford, began his career at General Mills before moving on to Citicorp. He joined Norwest in 1986 as vice chairman, switching to Norwest Corporation three years later.

He worked his way up to chief operating officer at Norwest, and after the company merged with Wells Fargo, served as chief executive officer from 1998 to 2007. His influence is felt well beyond banking, though, because he sits on the boards of directors for Cargill, Cisco Systems and Target Corporation. He also advises California Governor Arnold Schwarzenegger on economic development.

Kovacevich sees more buffering forces at work in the U.S. money supply, which is growing at a 14 percent rate, compared to 4 percent a year ago, and in Congress' recent passage of a $168 billion stimulus package. The government's continuing $200 billion deficit is a significant financial stimulus, he added.

"Even if home prices fall another 20 percent this year, they are still 55 percent higher than in 2000. Personal income and per capita income are both near record highs and the stock market is within 10 percent of its all-time high," he said. And while it's true that 9 percent of the economy is in decline — housing and auto — 91 percent of the economy is growing at a 3 percent rate, and commodity and energy prices are at all-time highs.

The sunny side

"Can we really be in a recession?" he asked the crowd. He doesn't think so, but Kovacevich is a self-described optimist who advises others to carefully consider who they listen to when evaluating economic trends. "Don't let the cynics, the media and the Internet chat rooms get you down," he noted. Remember to consider intangible factors that motivate workers, mold companies and eventually impact the bottom line when looking ahead, too.

For instance, Kovacevich said, on average a Mexican immigrant tends to be five times more productive when working in the U.S. than when laboring back home. Why? Influences are wide-ranging and include issues such as freedom of the press, religious expression and shared work ethics.

That said, even he concedes the U.S. economy is slowing. "GDP will likely be around 1 percent for the fourth quarter of last year and the first two quarters of this year. It could even be negative, which means a recession," he said. "But it doesn't make much difference if it is a recession, if it feels like a recession."

Appearance or reality, any recession won't last long, Kovacevich continued, because the worsening economic news indicates a bottoming out is imminent. A recession will also be limited in scope and impact, or as he put it, "a mile deep but an inch wide." More important is how long the recession lasts, he added. In the meantime, bankers can bring in millions of investment dollars by making a phone call to Dubai.

Like all the other lenders, Wells Fargo made some marginal loans that have defaulted. But Kovacevich insisted that the company avoided serious trouble — and lost market share — by refusing to participate in certain activities that are contributing to current conditions.

For example, Wells Fargo refused to deal in optional adjustable rate mortgages and negative amortization adjustable rate mortgages. Similarly, the bank declined to finance hedge funds or to do collateralized debt obligations. Less than one out of every 100 Wells Fargo loans was in foreclosure in 2007, he said, making the company's rate 20 percent better than the industry average.

"We saw this coming two years ago," he explained. "How did the sub-prime mess happen? Careless lending. There is a word for this 'stupid.' People were loaned money for houses they couldn't afford." Still, he acknowledges that Wells Fargo's risk management "is not perfect. Last year we took on too much risk, and added $1.4 billion to our credit loss reserves."

The ideal candidate: vision and values

To the business students attending Thursday's award luncheon, Kovacevich offered what he's learned during a 40-year career. "When I started out, there were no personal computers, no Internet, no iPods or video games. We engineers used slide rules, baseball bats were made of wood and Title VIII didn't exist," he explained.

A keen brain is valuable, but most useful to a company when paired with leadership skills, a team-oriented attitude, integrity and a willingness to be involved in the community, not just the boardroom, Kovacevich said. Today's ideal candidate is not just the student with the best SAT score, but, say, a well-rounded athlete and business generalist who demonstrates "vision and values," he noted.

"Perhaps a MBA is not the best degree to lead a company. I say you need four degrees," he continued: an associate's in believing in the company culture and the worth of the shared work; a bachelor's in affirming, which he describes as realizing "that everyone wants to contribute" and should be treated respectfully; a master's in motivation and fun, in the form of an enjoyable work environment and public recognition for outstanding performance; and finally, a doctorate in leadership, to help devise a vision of the future and help employees embrace it.

Kovacevich said there is a difference between leading and managing. Leaders share power with the team and lead by example. "They don't point fingers, they point the way," he noted. "There's zero room for a dictatorship or hierarchy." Instead, a well-lead company is fast and flexible in responding to market pressures. An example of his leadership style is that Wells Fargo employees are encouraged to make decisions related to their job rather than seek instructions from above.

His mantra is delegate, give responsibility, don't interfere. "As the Wells Fargo CEO — now chairman — I didn't run the company. My job was to select people to run our businesses, and then let them do that," he explained. "I believe that every answer Wells Fargo needs is within the organization somewhere — someone has the answer, and I just need to find them."

Bottom Line:

• Wells Fargo is the only AAA credit rated bank in the U.S.
• Known for its philanthropy, nationwide, Wells Fargo donated an average of $226,000 a day to non-profits in 2007.
• Wells Fargo is the third-largest employer in Arizona, with almost 15,000 employees. The company donated approximately $5 million last year to Arizona non-profits.