GARY, GARY QUITE CONTRARY.

Can Gary Wendt, Conseco's one-year-old CEO, GE-ify the troubled insurance firm?

The name Gary Wendt conjures many things for many people. Personal bankruptcy is never one of them. Yet there was a time when Chapter 13 loomed close at hand.

The year is 1969 and the man who would later be dubbed Jack Welch's secret weapon is just another fresh-faced Harvard b-school grad. He's working for a Texan real estate deal wrangler who can sell anything to anybody. What he sells to Gary is a job at his company and the idea of buying a stake in its future.

"He'd take me around to banks--this was in Texas back when there were a million little banks--and talk the banker into loaning me the money to buy the stock," Wendt recounts, adding that it seemed a great plan--until Texas real estate unexpectedly tanked. "I was 25 years old, suddenly I owed $120,000, and the company was being liquidated. I thought I might have to take personal bankruptcy."

Instead Wendt came up with Plan B--persuading the liquidation company management that he was best equipped to sell off his former employers' assets, a task he'd happily take on if they would take care of his debt. "I did and they did," he says.

To Wendt it's an example of mistake made, lesson learned. Others see it as much more. Admirers seize on the tale as early evidence of the deal-forging prowess that enabled the Wisconsin-bred Wendt to turn GE Capital into GE's growth engine, while critics point out that only the somewhat crass can stomach the notoriously unsavory liquidation business.

"Most people would not be able to palate a liquidation company," asserts a former Wendt colleague, who requested anonymity (as did several others interviewed for this article who expressed similar sentiments). "Selling used cars and real estate in Texas--takes a certain kind of person, a certain lack of class."

But even Wendt-bashers admit the man gets results. "To take that Glengarry Glen Ross background and turn it into what he turned it into," the former colleague adds, "you've got to be absolutely brilliant, and that's Gary--quirky and difficult, but undeniably brilliant."

A quick peek at Wendt's track record as CEO of GE Capital and "brilliant" seems an understatement. Recruited from a real estate investment trust he joined after the debacle in Texas, his very first project for GE was a feat of pure alchemy. The year was 1975, the place was Florida, and yes, the problem yet another real estate fiasco. This time a GE borrower was in mid-construction on condominium complexes stretching from Palm Beach to Key West when the bottom fell out of the market.

"Every bank dumped the assets held for 20 cents on the dollar or whatever," says Noel Tichy, who ran GE's Crotonville management development facility and co-authored the book The Leadership Engine, "but that's not Gary's instinct. Instead he negotiated deals with the contractors and continued to build. When the market came back he had 1,000 condos down there and made a bundle."

Wendt chalks the happy outcome up to a blend of luck and logic, with his unique brand of do-it-yourself chutzpah thrown in. "I got lucky," he shrugs, "the market turned. But it was also the simple sense that a half-finished condominium is worth nothing. And I didn't know at the time that I was supposed to spend a lot of time telling the other people at GE what I was doing. I just went and did it."

And therein lies the paradox that defines Wendt's GE career. While that early triumph proved the precursor to a long list of Gary-resuscitated assets and presaged his innate ability to find new revenue streams for GE Capital, Wendt never did get comfortable with the bureaucracy that existed in even that most agile of behemoths. "Gary is very stubborn about wanting to run his own show," says Tichy. "The tension he struggled with is that GE Capital is very different in terms of culture and rhythm and more entrepreneurial than the rest of GE. He didn't want to waste his time with the slugs making turbines and lightbulbs."

Wendt's inability to conform to the GE culture didn't stop him from succeeding there. Named CEO of GE Capital in 1986, his market vision, relentless focus on growth, and instant assessment of opportunity powered the division's rapid growth into new business sectors and overseas markets. By 1997, GE Capital's average five-year annual growth topped 15 percent, and the division was kicking in well over 40 percent of its parent's annual earnings.

In 1998, Wendt was asked to leave. Rather than missed earnings or a business scandal, his abrupt resignation followed a spectacularly messy public divorce from Lorna, his wife of 32 years, leading some to speculate that an inability--or unwillingness--to manage personal matters factored in his fate. But insiders assert that the virulent seeds were sown not by news of Wendt vs. Wendt splashing across the tabloids, but when Jack Welch and the board got serious about succession.

In many ways, Wendt, already running a multi-business corporation half the size of GE and growing faster, seemed an ideal candidate for the top job. Some say he lacked the necessary industrial business experience; others that he simply didn't get on well enough with Welch. Ironically, the same aggressively entrepreneurial style that fueled his success--and that success itself--worked against him.

"Put two heavyweights in a ring and what do you get?" asks Michael Allen, president of The Michael Allen Co. and a former VP of corporate strategy at GE. "You get a heavyweight fight. For GE Capital to be making 44 percent of GE's total revenue in 1997 and representing 74 percent of the parent company's total growth, clearly there was something of a power struggle going on."

Even had Welch been inclined to put Wendt in GE's much-speculated-about succession race, doing so would have meant cycling his star player through stints at the industrial and manufacturing units. Yet taking Wendt out of the quarterback role was unthinkable. "It was a catch-22," shrugs Tichy. "You've got the best guy in the world running GE Capital; it would have been crazy to take him out."

But eventually Welch did just that. "Jack was concerned that he would have trouble picking a successor to himself with me there operating 40 percent of the company," says Wendt. "That was his concern, and that's why I left."

Enter Conseco. A Carmel, IN-based financial services holding company with revenues of $8.2 billion, Conseco was in dire straits by the time Wendt took the CEO helm in June of 2000. Thanks to a string of acquisitions cobbled together by previous management, it had grown to become one of the country's largest life and health insurance firms, with life insurance, supplemental health insurance, annuity, and other insurance products geared toward middle-income customers. By 1997, the company boasted a hefty $41 billion in assets under management and net income topping $866 million on revenues of $6.6 billion.

Despite a disjointed and over-layered organizational structure indicating trouble integrating acquisitions--nearly one per year for the past two decades--Conseco soldiered along with a stock price hovering healthily above $40 and 1997 earnings per share of $2.54.

The real trouble hit in April of 1998, when previous management, led by CEO Stephen Hilbert, paid a handsome $7.6 billion for the dubious honor of acquiring Green Tree Financial, the nation's No.1 mobile home lender. The premise--realizing cross-selling opportunities between Green Tree and its new parent's 30 insurance-related subsidiaries--quickly fell by the wayside as Conseco struggled to assimilate Green Tree, taking on $2.5 billion in bank loans along the way.

On March 31, 2000, after losses in two consecutive quarters, Conseco made an ultimately unsuccessful attempt to sell off Green Tree, an admission of defeat that prompted its debt rating to drop several notches, which, in turn, decimated confidence in the company's insurance products and raised the cost of borrowing capital to unsustainable heights. Investor reaction sent Conseco stock into freefall--a 48 percent drop in one week.

When the dust cleared, the flamboyant, Ferrari-driving Hilbert was out and Wendt was in, his arrival signaling a sorely needed reprieve for beleaguered Conseco. Breathing new life into ailing firms is a Wendt specialty, and he lost no time announcing a "restoration plan" for Conseco (see sidebar, page 30). Tackling the trouble spots one by one, Wendt chucked whole layers of management, divested assets to reduce debt by $1.7 billion, and negotiated more favorable loan terms with the firm's creditors.

With pressure off the balance sheet, he's now turning his hand to GE-ifying operations. He brought in GE Capital Six Sigma guru Ruth Fattori and denuded Conseco's offices, selling off its impressive collection of oil paintings and chopping the basketball-court-sized CEO office--with its faux marble pillars, high ceilings, and richly paneled walls--into three smaller offices to bring key staffers closer to hand.

Clearly Conseco needed Wendt, but what's in it for him? After all, other GE alums ended up at the likes of 3M and Home Depot. "He's too old and too difficult, he wouldn't be an easy person to find a spot for," suggests Wendt's ex-colleague, who adds that the turnaround task is right up his street. "It's actually the perfect place for him. He has to save that place, and there's no one better at pushing people to get better results, to think bigger and broader, to cut out fat and get more profit."

Certainly money wasn't the motivation. Wendt's platinum parachute from GE included a non-compete clause that even a $45 million signing bonus from Conseco didn't fully match, and the balance of his pay package--$55 million--is tied to stock-related benchmarks.

What Conseco can offer is the opportunity to do what Wendt has done countless times before--save a troubled company--this time without GE's name, wealth of resources, and triple A rating behind him. Fielding questions in a partially walled-off office strewn with construction gear, Wendt seems invigorated by the challenge. Yet, the realities of going it solo have already cropped up. "The one thing that was confusing to me at the beginning was the credibility issue surrounding Conseco--I would tell people what we were going to do and nobody would believe anything I said," he recalls. "It was depressing, because I'm used to telling the truth and having people believe me.

Analysts, for the most part, have since come around. "Conseco was in crisis mode, and Gary effectively determined a strategy for the company, articulated it to the market, and delivered on various milestones along the way," says Mark Girolamo, managing director at Deutsche Banc Alex. Brown, who now shares Wendt's vision of the company as a "diamond in the rough." A.M. Best and Moody's have also rallied with upgrades of Conseco's credit rating, while investors have pushed its stock price, which had dropped from a high of $57.75 to $4.77 prior to Wendt's arrival, back into the mid-teens.

A few holdouts still caution that Conseco is not yet out of the woods. Pointing to a rise in loan delinquencies and its strategy of reselling repossessed mobile homes rather than writing off the defaults, an analyst at Salomon Smith Barney notes, "You have to question the credit quality of what they're doing and whether it will come back to haunt them. There's an old saying in financial services, 'Your first loss is your best loss.'"

Wendt dismisses the concern. "The delinquencies are the same as they've ever been, and yet Green Tree had been making a profit financing manufactured housing for 25 years," he says. "You will have losses and you price for that."

To Wendt, Conseco has turned a corner, and he's clearly relishing the road ahead. "I'm beginning to have a lot of fun here now," he says. "Once you get the banks off your back and the litigators to see eye to eye with you, it's fun working with the people here. And they're mostly younger people now. It gives me a chance to be the mentor."

Warning: Work in Progress

Any new CEO coming in, especially one from outside, faces unwelcome surprises. What were yours?

If there was a surprise, it was the credibility issue, which was a combination of two things. First, the fact that they had always played close to the edge. The previous CEO was a flamboyant guy who spent a lot of money, and so it was a controversial company. Second, it's a new world in terms of how the Internet and day trading affect your stock value.

This company has two mortal enemies. One is the plaintiff's bar, where you have people who file class action suits over small things, which we have our share of, like any other consumer finance firm.

The other enemy is short positions. It got to where as much as 20 percent of our total shares were owned in a short position. In today's world of open and free disclosure, they're allowed to say anything, and it was in their best interest to state things that weren't good. We, as company officers, are not allowed to say anything we want--we have to say things that are truthful.

Passing rumors, even untrue, knock prices down and, for my first few months here, no matter what I said, within a week there would be some press release, article, or Internet chat room that would take it and twist it. I wasn't ready for that: this group of outlaws out there taking everything and twisting it around.

Coming into a new and troubled company--which many saw as unsalvageable--after 25 years at GE, what was your assessment of the situation?

There were several boulders in the road that we had to push out of the way to get where we are now. The first was debt that was due in 60 days and throughout the next year. The second was the fact that the finance company had been running on a strategy causing them to absorb enormous amounts of cash, which we didn't have, so we needed to come up with a new business model. And third was the A.M. Best rating, which had been reduced down to B level, which is a very hard level for an insurance company to operate with.

Rather than go to the banks and negotiate from a position of weakness, I hired three of my former associates at GE Capital as "restoration activists" to look for the assets we could sell to pay the debt. Only after we'd turned the financial company model into a cash producer, not a cash user, did I sit down with the banks and negotiate. The banks were concerned that we didn't talk to them earlier, but I didn't have anything to talk about.

So we were able to approach them with a plan that said, "We have $2 billion of assets that we can either sell or refinance. And that will take care of all our debt service through 2001." It was a believable, doable, practical solution to their problem, so they accepted it.

Would those businesses have been growth areas if not for your debt?

Nope, I'd have sold them anyway. We closed and either sold or ran off five of the finance company businesses. I would've done that even if we had $1 trillion, because they weren't big enough to compete in that area. The Argosy Riverboat was profitable, but I just don't think that a Midwestern insurance company should be in the gambling business.

The Tritel Wireless stock we have yet to sell, and that bounces around like a tennis ball in its value. But what's the strategic value of an interest in a wireless phone company? None.

On the finance side, there's been criticism of Conseco's 1998 Green Tree acquisition. What went wrong?

The accounting practice was the problem with the old Conseco. Under the gain on sale accounting method it used, you estimate the total payments you're going to get for the life of the loans made, how many will go delinquent, how many you have to foreclose on, and then book the receivables for the life of the loan as present income.

If your assumptions are wrong, you write it [oft]. That's the thing that dragged Conseco down--a misunderstanding of the risks in gain on sale accounting. We now use [portfolio accounting] where you book the income on a receivable once you get the check.

Analysts suggest Conseco lowered its qualification requirements to write enough new loans to offset the mounting write-offs.

Actually, they kept credit standards the same. We checked, because I thought they had tried to accelerate more lending activity that way. But the numbers say they didn't.

Manufactured housing is our least understood business. We have a 30 percent share of an activity that is 14 percent of the nation's housing stock. These are [borrowers] who don't go to J.P. Morgan. We'll admit that. Yes, you will have losses, so you price accordingly.

Boulder Dashing 

Last year, eight of the company's 11 board members, who participated in a frowned-upon stock purchase program, had company-guaranteed bank loans. How did you remedy that?

That was another boulder in the road. I told them, "We're not going to operate like this. I want you to resign from the board or pay off your loans so you don't have this potential conflict of interest." Three paid their loans and stayed. Three didn't have the financial resources, but they resigned and we reached an agreement on how they will repay their loans. The other two resisted both resigning and paying off the loans, so we used a little-known and never-before-used Indiana statute that allows the majority of the board to dismiss a minority of the board.

We will now start rebuilding it with more diversity, and with people who are proven in the world of business.

Are you GE-ifying Conseco?

Absolutely. I'm going to manage this the same way I managed GE Capital. At my age why try a whole new idea? A lot of people might say, "Uh-oh, here's Wendt from GE, he's going to change the culture." But there was no culture to begin with. These people made 18 acquisitions over a period of 12-plus years. And their strategy was to get rid of all the top management--CEO, CFO, CIO--and stuff all the responsibility for those roles into corporate headquarters. The people doing the business were basically just a sales force. They didn't have the authority or the accountability for making decisions.

We solved that with one memo. It said, "Effective tomorrow all the business units will report directly to me." The next day we had a player draft where the seven, who didn't have staffs, took from the corporate staff whomever they wanted. Now I have seven organizations that are accountable to me for producing profits. Before I had a corporate staff that was responsible for producing profits, which meant you could only do it one way--by accounting.

But maybe most important of all the GE things that I bring here is personnel reviews that will take place once, sometimes twice a year. Those seven people are from the [old Conseco]. They now face the challenge of being business leaders, not just order takers. This is the year when we'll see how good they really are.

What's your take on your own first-year performance?

What we had to do here was much more difficult than I thought it would be. I just expected the banks to say okay, the rating agency to say okay, and the shorts not to bother me, because I had this good reputation. When you start out and you know so clearly what has to be done, you wonder why the whole world doesn't agree with you. But they don't. But we got it all done anyway.

What's next in your restoration plan?

My job now is to to build a culture of accountability among various layers in this organization and make the insurance business as good as the finance business, We're in a pretty good market. Our customer is the middle American 55 years and older with $25,000 to $75,000 in annual income--a growing market. Now we need to have more products and better customer service for them, and to make sure the returns we're getting for the shareholders are what they deserve.

What do you see as a potential concern--something that might derail your plans for the future?

The insurance businesses are very competitive, so we're going to have to be sharp, because other people out there are getting better. American General was a fairly close competitor and they were just bought by AIG, which knows how to run companies. So they'll get better and that means we'd better get better, too.

What does the post-turnaround future hold for Conseco?

During my last 10 years at GE Capital we did 300 acquisitions. I'm not going to do 300 here, but we might do two or three. We will want to be considering that next year. Our projection is that we can grow earnings per share between 25 and 45 percent a year over the next three years. If we do that, our stock will provide the currency we need.

"Fear of missing your numbers" was said to be a primary motivator at GE. What drives Conseco managers?

We motivate through rewards. This company had a bonus program that was 100 percent subjective; how the CEO felt about you at the end of the year determined your bonus. This year, if people make their numbers, they will get a certain amount of money; if they exceed them, they will get more.

What about you? What's Gary's motivation? Did you have something to prove after leaving GE?

I was the CEO of GE Capital for 15 years and it went from 7 percent to 40 percent of earnings. I didn't have much left to prove there. And I don't feel the necessity to prove it here. I'm 59, I'm too old to start worrying about corporate politics. But I do want to make sure that we build a good company for the roughly 14,000 people who work here.

It's said you and Jack Welch didn't always see eye to eye. How would you characterize your relationship?

My relationship with Jack was strictly boss and direct report. It was not personal other than that. He and I agreed 99.5 percent of the time and I learned an awful lot from him. A good bit of what I'm applying here now I learned from him. So I have to say he was a mentor even though we didn't have a close personal relationship.

What's an example of something you didn't agree on?

I had a chance to buy a credit card company, which is now MBNA, for a song from the government because it was a subsidiary of one of the banks that went through big problems in the late 1980s. He didn't think the credit card business was a good business. He won.

Many feel that the media fanfare surrounding your divorce hurt your career. Had that not happened would you still be at GE?

I really don't know. I know that I wasn't going to replace Jack because I was too old. I was within six years of his age, and they like to pick people who are [within] 10 or 20. I was also operating 40 percent of the company. It made sense to me why he thought he ought to give me a big package and tell me to go away. It did give me the chance to marry a wonderful woman-that's the biggest impact it had.

GE insiders say you are not a typical GE CEO. How did you fit in there?

I was successful to the point that they couldn't fire me. And they were paying me a lot, so I didn't want to leave. Plus I had a lot of fun. I was traveling all over the world making deals and motivating people to do better, and that was very rewarding, even though it was hard.

So I was having a lot of fun there, and I'm beginning to have a lot of fun here now.

                      Conseco's Performance Under
                             Wendt's Watch
                   HOW CONSECO PERFORMED VS. INDICES
                           06/27/00-04/19/01
Conseco (CNC)         +175.265%
S&P 500                -13.571%
Dow Jones Industrial    +1.802%
SOURCE: ELIAS ASSET MANAGEMENT
Note: Table made from bar graph

Turnaround TIMELINE

Named CEO of Conseco on June 27, 2000, Gary Wendt came to a financial services and insurance firm riddled with troubles. Its finance business was hobbled by $8.3 billion in bank and public debt and a B- credit rating. Eight of its nine board directors had Conseco-guaranteed bank loans. And previous management (former CEO, Stephen Hilbert, ousted April 28, 2000) had left behind a confusingly multilayered and disfunctional corporate structure. This timeline tracks Wendt's turnaround gameplan from Day One.

6/27/00 / Wendt named CEO.

7/5/00 / Conseco announces sale of its bankcard portfolio to Wells Fargo.

7/27/00 / Wendt unveils "restoration plan," including restructuring plans for Conseco Finance and plans to sell non-strategic assets to reduce debt.

9/22/00 / Wendt pays off $650 million in debt and successfully negotiates favorable restructuring of terms for Conseco's remaining bank debt.

10/17/00 / Organization is de-layered.

"As of this month, the 10 Conseco operating business unit heads report directly to me," says Wendt.

10/26/00 / Conseco announces Q3 net loss of $489 million, compared to net income of $155 million in 1999.

11/7/00 / A.M Best raises Conseco's rating to A-.

12/11/00 / Conseco sells Conseco Finance's vendor services business to Wells Fargo for $160 million.

11/12/00 / Two remaining Conseco board directors with large borrowings under the stock purchase plan are removed. "Our board is now free of directors who owe money to the company or have loans guaranteed by the company," says Wendt.

12/15/00 \ Conseco retires $132 in public debt. "In September, we repaid $650 million of bank debt. These two repayments alone will reduce Conseco's annual interest expense by approximately $68 million," Wendt says.

12/19/00 \ Sale of Argosy Riverboat gaming facility for $260 million, $35 million more than estimated, announced. Company projects 2001 earnings of 0.90-$1.10 per common share.

1/11/01 \ Conseco announces new line of mutual funds.

1/19/01 \ Wendt brings in former GE Capital Six Sigma guru Ruth Fattori.

3/16/01 \ Repos of mobile homes rise in Q1 2001.

3/21/01 \ Conseco appoints Charles B. Chokel CFO.

4/23/01 \ Wendt announces plans to cut 2,000 Conseco jobs over 21 months, and to acquire India-based EXL Service for $52.6 million. EXL, which Wendt helped found and in which he has $1.1 million invested, will handle Conseco's back office and call-center work. Wendt "will not receive any payment from EXL until Conseco realizes savings that equal the cost of its purchase," the company reports.

4/24/01 \ Conseco Q1 operating earnings of $54 million, or 16 cents a share, beat analysts' prediction of 14 cents per share. "We are building shareholder value by running the businesses, not via acquisition, which was the 'old' Conseco," says Wendt.

4/25/01 \ Moody's shifts to a positive outlook on Conseco. Credit Suisse First Boston upgrades Conseco from "hold" to "buy."