Beyond the Herd

As of June 30, 2009, Northern Trust had $75 billion in banking assets, $3.2 trillion in assets under custody, $558.9 billion in assets under management, and over 20 percent of the Forbes 400 Richest Americans as clients. It has 80 offices sited in 18 U.S. states and international offices in 15 locations in North America, Europe, the Middle East, and the Asia-Pacific region.

Steve Player: Northern Trust was one of the banks that ended up taking government money. What was the reason for this, and what did you do to move through that as quickly as possible?
Steve Fradkin: You have to remember what was happening in the world after the collapse of Lehman Brothers. Today, it is easy to talk about the successes and failures of the so-called TARP program and debate what should or should not have been done. But at that moment, everyone in financial services was working 24 hours a day, 7 days a week -- the Treasury Department, the Federal Reserve, all the big banks, investment banks, and other market participants. And, remember, at that time, the credit default swap market was pricing a 50 percent probability of failure for some of the nation's biggest and best-known institutions. There was huge uncertainty for everybody; it was terribly frightening.

It was in this context that the so-called TARP CPP [capital purchase program] was rolled out. Remember, too, that at the outset, this program was positioned as a "healthy bank" program. While the program was "voluntary," there was enormous encouragement to participate, and we opted to do so.

Since that time, much has changed, and we opted to redeem the preferred stock investment and purchase the warrant, which, in combination with the dividends paid, turned out to be a very handsome return for the U.S. Treasury and taxpayers.

SP: Northern Trust's name doesn't get mentioned with a lot of the calamity that's going on in the financial services industry. How have you managed to steer past the pitfalls that tripped up other companies?
SF: The financial crisis was no stress test. It proved to be a "stress reality" far more serious than anyone expected. This noted, you are correct that Northern Trust navigated this storm very effectively. While there are many factors that contributed here, the root of our performance came down to strict adherence to a very focused business strategy anchored in attractive demographic businesses that are relatively lower-risk and higher-growth.

These strategic choices were also complemented by a consistently very conservative strategy. We did not follow the herd. We were conservative with our balance sheet investment portfolio. We were conservative with our loan portfolio. And, we were conservative with our business strategies. Our formula has been consistent, simple, and distinctive. Operate in attractive businesses. Focus intensely on serving clients with excellence. And, execute with conservative financial strategies. It is not a complicated formula. What is complicated is sticking to it when the herd diverges and ignores risk. Fortunately, we stuck to our strategy and were, in the end, rewarded for our attractive operating model and execution.

SP: Thinking back to a year ago when the financial markets start to reel, what was happening here at Northern Trust? How did you keep marching forward with that same strategy and result?
SF: Northern Trust's GAAP reported revenues increased 21percent in 2008 vs. 2007, while operating revenues, adjusted for one special item, increased 16 percent vs. 2007. The performance compared very favorably to a market environment exemplified by a 38.5 percent decline in the Standard & Poor's 500 stock market index over the same period.

Though not immune from the financial markets, we kept marching forward amidst the difficult environment building on our strong corporate culture. As a company, we stayed very focused. There were lots of things going wrong -- at Bear Stearns, Lehman Brothers, UBS, Freddie Mac and Fannie Mae, Lehman Brothers, AIG, Wachovia, Merrill Lynch, and elsewhere -- but knowing who we are and staying focused were the key dimensions.

SP: Did you see a flight to quality? Was that part of the reason revenue was up?
SF: Yes. We absolutely did see a "flight to quality" and "flight to safety" phenomenon, particularly during the peak of the crisis. Individuals and institutions were truly scared, and they were looking for proven beacons of strength during this period. Northern Trust clearly was a beneficiary of this phenomenon.