When people think of Jack Stephens and Arkansas banking, they think of Stephens Inc., the Little Rock-based investment bank started by Jack’s brother Witt, now run by Jack’s son Warren. But Jack’s influence on banking in Arkansas extends far beyond the family firm, where he was CEO for 30 years.
His work to recapitalize and revitalize Worthen Bank in 1985 was perhaps his most high-profile action outside of Stephens and is a truly inspirational business success story. That decision, while singular because of the effect it had on the state of Arkansas – its businesses and its people – shouldn’t be seen in isolation. It was a reflection of his belief that Arkansas needed a vital banking system and the culmination of some 30 years of shrewd business moves based on that belief.
Jack and Witt had a real love and affinity for the banking business. In the early days of Stephens and especially during Jack’s tenure, their investments in small, local Arkansas banks were significant – some 30 separate investments at one point. When Arkansas passed bank holding laws in 1983 that made branching illegal and restricted owning a chain of banks they reduced ownership to just four or five banks.
Jack was frustrated by not only local regulation but federal regulation – the McFadden Act – that limited interstate banking. His theory was, “I like the banking business and these geographic limitations won’t last.” He invested in that idea by taking 4.9 percent stakes in banks where he either knew or got to know the CEOs and owners. Later, the McFadden Act went away.
By the time of the Worthen rescue, Jack had sold most of his bank holdings and was making private equity investments outside of the banking arena. He did, however, along with Witt, Warren, and the Riady family own 33 percent of Worthen Bank.
And then Easter week 1985, there was this extraordinary event. The management team at Worthen did a $57 million repo trade on behalf of the Arkansas state pension fund with a government securities company in New Jersey that turned out to be a Ponzi scheme. They were double and triple pledging repo collateral before there were proper rules against such things. They did this repo trade the Thursday before Good Friday and the company never reopened.
Worthen, the state’s largest bank, had $55 million of capital at the bank level that was essentially wiped out. You know, part of being a capitalist is making the market decision and making the tough decisions, so Jack’s first response was, “Well, the bank is broke, that’s that.”
The regulators planned to close the bank, but Jack started to feel a combination of pressure and obligation to do something to rescue it. Worthen had been a driver of economic development in Arkansas since 1870, and the idea that it would go down was a horrific prospect. Among the casualties would have been the state pension fund, holding the life savings of Arkansans. After meeting with the Federal Reserve, Jack agreed to lead a recapitalization – but insisted on management changes, which included having me go work for the bank. There was an argument to be made that the loss should have fallen on the pension fund, which would have hurt thousands and thousands of families, but Jack decided that the bank would take responsibility.
Jack’s proposal was very interesting. The bank lost $52 million. There was a $20 million errors and omission policy, which we figured we could collect on. He worked out a deal with the Fed that he would raise $32 million in a rights offering at $4.50 per share. It had closed at $33.
Jack basically said to public shareholders, “Look, our bank is broke but we’re going to recapitalize it and you have the right to participate in the recapitalization at this much lower price at exactly the same percentage you had before. If you want to protect yourself from dilution and go forward with us and try to set this right with us, you can. If you don’t, then somebody else can buy the rights.”
To give the Fed confidence, Jack, Warren, and Witt agreed to underwrite the rights offering – a necessary gesture to give not only the Fed but other investors the confidence to invest. As it turned out, all the rights ended up being fully subscribed.
So after the deal, the Riady family, and Jack, Warren, and Witt ended up with 33 percent and the public had 67 percent – the same as before.
Several things often get lost when telling stories of capitalism, particularly when these stories end well. You make decisions by weighing the risks, but it’s not a sure bet. Ideally capitalism provides opportunity for all and its benefits are not concentrated on just one group. In the Worthen deal, the public had just as much ownership and opportunity to invest as it had before the bank went broke. And it’s not just about making good market decisions. You have to make good management decisions. There were a lot of difficult ones to make around Worthen, but ultimately a lot of good came from this deal.
One thing that sets great capitalists apart is vision. They see a better way, a different way than how things are being done. Nowadays, it’s popular to call people like Jack “disruptors.” That word doesn’t do them justice. To disrupt is to take something apart. Jack was about building and when necessary, putting broken things back together.