6 Dumbest Things on Wall Street: March 6


AIG Goes Postal

Here's a Five Dumbest riddle: What is government-backed, costs 42 cents and continues to take a licking?

No, not a postage stamp. It's a share of AIG.

The American International Group (Stock Quote: AIG), once the world's largest insurer, set a new record Monday when it reported a fourth-quarter loss of $61.7 billion, the largest in corporate history. For the full year of 2008, AIG reported a loss of $99.3 billion, or $37.84 a share, as it felt the brunt of continued "severe" credit market deterioration and charges related to its restructuring.

AIG shares closed at 42 cents Monday, or the price of a single first-class postage stamp, down more than 99% from a year ago.

Not to worry though, AIG chieftains. As a reward for your monumentally poor performance, another big, fat government check is already in the mail.

The Treasury Department announced Monday the creation of a new $30 billion equity capital facility in exchange for noncumulative preferred stock in AIG. This latest handout comes on top of the $150 billion it has already lent the insurer. The Treasury and the Federal Reserve also outlined a massive restructuring plan for AIG's existing debt, easing up on terms and accepting payment in the form of preferred stakes in relatively healthy subsidiaries.

The action by the Treasury and Fed marks the fourth time the government has stepped in to help AIG since its initial lifeline in September 2008. In a joint statement, the agencies say their latest restructuring plan is designed to "stabilize this systemically important company" until it can slim it down by selling off parts.

In other words, AIG remains too big to fail even now that its 78% owned by the federal government. And neither snow, nor rain, nor heat, nor gloom of night will keep more rounds of taxpayer dollars from being delivered into this financial black hole.

Dumb-o-meter score: 95 -- Like the postman, AIG always rings twice when it needs money. Then it rings again, again and again.



The Oracle's Options

Warren Buffett, much to his credit, is the first guy to tell you when he does something stupid.

Allow us to be the second when we say Buffett's derivatives strategy seems less than sensible even by his own high standards.

The so-called Oracle of Omaha owned up to some pretty big blunders in Berkshire Hathaway's 2008 annual report (Stock Quote: BRK.A) released last Saturday. In his widely read letter to shareholders, Buffett admitted doing "some dumb things in investments" last year, most notably buying a chunk of ConocoPhillips stock (Stock Quote: COP) when oil and gas prices were near their peak, as well as shelling out $244 million for shares of two Irish banks now valued on his books at just $27 million.

"The tennis crowd would call my mistakes 'unforced errors,'" Buffett wrote about those particular money-losing episodes.

Overall, Berkshire's 2008 net income of $4.99 billion, or $3,224 per Class A share, was down 62% from last year. Buffett estimates Berkshire's book value—assets minus liabilities—declined 9.6% to $70,530 per share in 2008, the biggest drop since he took control of the company in 1965.

It's not a few faulty stock selections, however, that earned him a spot on our Dumbest list. Buffett has more than enough goodwill to overcome a few stock picks gone sour in a market gone mad.

No, it's the options portion of his portfolio that has us nonplussed. We can't stop wondering why a guy who preaches against options as "financial weapons of mass destruction" and "time bombs" keeps using more and more of them.

So far, Berkshire has sold more than $37 billion worth of equity put contracts covering the S&P 500 and three foreign stock indices, exercisable only when they expire, between 2019 and 2027. The options buyer will make money only if stock prices on the expiration date are below their level on the day when the contract was written. In the meantime, Buffett gets to use options premiums totaling $4.9 billion to invest as he pleases.

Put simply, Buffett, a long-term optimist on America's economy, is betting that stock prices will rise over the next decade or two.

Unfortunately, Buffett's timing could not have been worse, and the bets have been a short-term nightmare. As a result, Buffett had to post a mark-to-market loss of $5.1 billion on these contracts, dragging down his overall results.

After stating "derivatives are dangerous," Buffett devotes nearly five full pages in his latest shareholder letter to explaining why his particular derivatives positions are anything but. His primary reasons are that each contract was "mispriced at inception," and more importantly, he does not have to put up cash as collateral if the market goes against him.

Although money-losers so far, these sweet deals constitute shrewd investing rather than a sin against investment style, if you listen to Buffett.

We say Buffett is being hypocritical in his derivatives dalliances, even if his wagers eventually turn out to be winners. The only reason why he was able to get such terrific terms for these contracts is because he is Warren Buffett, arguably the greatest investor who ever lived.

But he won't be much longer if he keeps acting against his own good judgment.

Dumb-o-meter score: 95 -- Time for the Oracle to get his vision checked.



Immelt's Insignificance

It's time to tune out Jeff Immelt.

By the looks of things, everyone already has.

The embattled General Electric CEO (Stock Quote: GE) admitted his company's reputation was "tarnished" in its annual letter to shareowners Tuesday. Immelt accepted responsibility for turning GE from a "safe and reliable" growth company into one that is overly leveraged to its now struggling financial business. He also promised to "reset expectations" in an economic environment that he sees as an "opportunity of a lifetime."

Unfortunately, his mea culpa and sunny outlook did nothing to stem the bleeding in GE's stock, which fell below $6 a share Wednesday, a 16-year low, over concerns that its GE Capital unit will need to raise additional funds to cover losses. The cost of protecting GE Capital's debt against default rose to a record high Wednesday. In the credit default swap market, investors were being asked to pay $2 million in an upfront payment plus $500,000 a year to insure $10 million of debt.

In a letter to investors, a GE spokesman disputed claims that the company needed to raise outside money as "pure speculation." This flack's plea was ignored, however, as investors chose to sell first and ask questions later.

And who can blame them? Immelt's credibility is subzero. Let's do a quick recount, shall we?

Shareholders listened to Immelt in January when he said in a letter that he was "committed" to a $1.24 per share dividend for the 2008. That pledge was broken last Friday when GE slashed its quarterly coupon from 31 cents to 10 cents in order to save $9 billion a year.

In the same letter, Immelt said, "We run the company to have a Triple-A credit rating, and we have significantly strengthened our liquidity position."

Now, he is quietly backing away from this pledge as well. Instead of an iron-clad guarantee that GE will do what it takes to maintain its pristine rating, Immelt writes this week in his annual report that he plans to operate the company "with the disciplines of a Triple A."

Sorry, Jeff. You either get the rating or you don't.

Likewise, you either have the market's trust, or you don't.

And right now, it's clear that you're not even close.

Dumb-o-meter score: 80 -- Immelt is welching on his promises. And we don't mean Jack Welch.




King Ken's Job Security

No matter how low Bank of America's stock sinks, CEO Ken Lewis isn't going anywhere.

So says Ken Lewis.

The imperial CEO informed the Financial Times Monday of his plans to stay on as head of the North Carolina-based bank (Stock Quote: BAC) until it repays the $45 billion it received under the government's Troubled Asset Relief Program. Lewis estimated a total repayment of taxpayer dollars could take two to three years, which would extend his tenure in the bank's top spot to at least 2011. Lewis added that "by that time, we will be seeing the success of the Merrill Lynch acquisition."

Bank of America received $25 billion from the Treasury in September and another $20 billion in late December to secure its capital base against a $15 billion fourth-quarter loss by Merrill Lynch.


Lewis called his decision to take the extra $20 billion a "tactical mistake" because "it put us in the same category as Citigroup" (Stock Quote: C). Lewis told the FT he would have been better off requesting a mere $10 billion instead.

What really galls us, however, is Lewis's attempt to guarantee his job, even as the company's shareholders have lost 90% of their value over the last year, primarily due to his dumb decisions to overpay for money-losers Merrill Lynch and Countrywide. Not to mention, Lewis quietly approves millions of dollars in Merrill bonuses in the 11th hour, even as he was accepting public dollars to complete the deal.

"It would be very easy to disappear into the sunset, but we have to slug through this," said Lewis.

On the contrary, Ken. Do everyone a favor and disappear. Your shareholders and employees have certainly been slugged enough.

Dumb-o-meter score: 85 -- Time to kick King Ken to the curb.




Ryanair's Potty Plan

If this is Michael O'Leary's idea of toilet humor, we don't think it's at all funny.

Last Friday, the CEO of Irish airline Ryanair (Stock Quote: RYAAY) suggested that future Ryanair passengers might be forced to pay a British pound, or $1.40, to use their planes' lavatories. Last month the discount airline announced that it would charge passengers 30 pounds ($42) if they could not fit their duty-free purchases into a single piece of hand luggage.

"One thing we have looked at in the past, and are looking at again, is the possibility of maybe putting a coin slot on the toilet door, so that people might have to actually spend a pound to 'spend a penny' in future," said O'Leary during a BBC interview, employing a local euphemism for relieving one's self.

When asked what would happen if a customer felt the urge to go, but lacked the correct change, O'Leary dismissed the scenario, saying, "I don't think there's anybody in history gone on board a Ryanair aircraft with less than a pound."

Of course Ireland, as well as most of Europe, uses euros and not the British currency, but that's beside the point of this perverse toilet tax.

The Dublin-based company already nickels and dimes (or should we say pounds and pences) its customers, charging $14 to buy a ticket with a debit or credit card, $84 to check sports or music equipment and $70 to change a flight. Adding a toilet charge would only add insult to inconvenience.

O'Leary's chief spokesman, Stephen McNamara, said his boss often "makes a lot of this stuff up as he goes along and, while this has been discussed internally, there are no immediate plans to introduce it."


Even bringing up the idea is just pure loo-nacy.

Dumb-o-meter score: 90 -- O'Leary just joined our Dumbest Mile High Club.




Bonus Item!: GM Not Going Anywhere

Thanks, General Motors. Now tell us something we don't know.

General Motors (Stock Quote: GM) said Thursday that mounting losses and its inability to generate sufficient cash flow to meet obligations caused its auditor to raise "substantial doubt" about its ability to continue as a going concern. The disclosure, included in the company's 10-K filing with the Securities and Exchange Commission, caused shares of the humbled automaker to fall 17% to $1.82 in Thursday trading.

The company has piled up $82 billion in losses during the past three years, including $30.9 billion in 2008. Earlier this week, GM reported February vehicle sales slid nearly 53%.

"There is no assurance that the global automobile market will recover or that it will not suffer a significant further downturn," the company said in the filing.

We beg to differ. Odds are strong that the global auto market will rebound eventually. Americans need cars like they need oxygen, maybe more so considering our bestselling models are usually the worst for the environment. And when did our friends in China, Canada and Mexico—just to name a few spots—give up driving anyway?

The question is whether GM will come back with it. And in what shape.

GM has received $13.4 billion in federal loans as it scraps for survival. It is seeking a total of $30 billion from the government. Without the additional government relief, GM is surely roadkill.

We fully understand that GM's auditor, Deloitte and Touche LLP, had to cover its own rear end by adding the "going concern" warning. And GM is probably happy to receive it, given that it always needs to boost its case to get help from the feds.

That's fine with us, but let's be honest here. GM is not a going concern. It's an almost-gone concern.


Dumb-o-meter score: 75 -- The bright side? At least GM will have plenty of company in bankruptcy court.



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