Ten Dumbest Things on Wall Street: 2008

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As our very own Jim Cramer likes to say, "There's always a bull market somewhere." And in 2008, the bull market for dumbness soared as Wall Street sank to new literal and figurative lows.

The year 2008 was surely an annus horribilis on Wall Street, and not just for hedge fund managers, investment bankers and Madoff victims. From Eliot Spitzer's shocking revelation and resignation as Governor last March, through the collapse of Lehman Brothers this September, until, most recently, the discovery of Bernard Madoff's $50 billion ponzi scheme, investors worldwide were treated to an unending string of shenanigans and bad news. As a result, stocks fell nearly 40% for the year, while layoffs and taxpayer bailout funds were way, way up.

On the bright side, we here at the 5 Dumbest Lab were blessed with a surfeit of stupidity from which to choose our weekly jibes. Like the luckiest fisherman in the world, we didn't need a net to scoop up all of Wall Street's silliness. It just jumped in our proverbial boat.

And as difficult as it was to select a starting five each week, it was even tougher to sort through all that dumb material to find the year's 10 best.

So with this in mind, and hope for better times ahead, we offer you this, our countdown list of the Top Ten Dumbest Things On Wall Street In 2008.

DUMBEST OF 2008 #10

Spitzer Spit Out

By Mike Taylor, 3/14/08

Earlier this year, erstwhile New York Gov. Eliot Spitzer shed his renown as a noted prosecutor of high-end Wall Street firms and assumed new prominence as a notorious patron of high-end prostitutes.

To recap, The New York Times broke news of Spitzer's illegal, immoral and alleged patronage of Emperor's Club VIP, a very expensive prostitute ring. The New York governor resigned in disgrace two days later.

To make matters dumber, when Spitzer covered the cost of the "pretty, American" brunette's Valentine's Day Eve trip to Washington's Mayflower Hotel from New York, he was technically violating the Mann Act, a 1910 law no one had heard of but that Spitzer-haters now treat like a Bill of Rights amendment.

Things really reached the apex of inane when, within minutes of the revelation, CNBC's sweaty on-air editor Charlie Gasparino leapt to the airwaves to plug his new book, King of the Club, while fitting in some comment on the news someone else broke.

Spitzer's downfall was reportedly met with shouts of joy on Wall Street. As New York's attorney general, Spitzer had fought aggressively against the market's biggest names, including noted AIG (AIG) founder Hank Greenberg, former Goldman Sachs (GS) boss John Whitehead and Richard Grasso, onetime chief of NYSE Euronext's (NYX) New York Stock Exchange.

Traders in the Financial District, widely known for their respect of the law and their avoidance of prostitutes, took comfort in Spitzer's immolation as a hypocrite and fraud. Those oft-persecuted Wall Streeters, who until this week had nothing to protect them but mountains of money, could rest easy.

For once, the law was also on their side.

Update 12/26: Once Wall Street's strictest sheriff, Eliot Spitzer now spends most of his time uptown, leisurely attending to his family's real estate business. In early December, Slate.com revealed the former governor will be writing a bi-monthly column on the financial markets. Our opinion is that he'd get more readers -- and maybe even a mini-series -- with a juicy tell-all.

DUMBEST OF 2008 #9

Mr. Mozilo Goes to Washington

By Nat Worden, 01/18/08

Speaking of the slow-motion train wreck on Wall Street, whatever happened to the conductors that steered us into it?

Before riding off into the sunset to count their riches, they first made a stop on Capitol Hill, to visit Henry Waxman, chairman of the House Oversight and Government Reform Committee.

"According to press reports, you collected tens of millions of dollars in payments and other compensation upon your departure from Citigroup," said Waxman in his written invitation to former Citi (C) CEO Chuck Prince to testify before his committee. "You should plan to address how it aligns with the interests of Citigroup's shareholders and whether this level of compensation is justified in light of your company's recent performance and its role in the national mortgage crisis."

Lest Prince feel guilty about having the stage all to himself, the invitation was also extended to former Merrill Lynch (MER) CEO Stan O'Neal and the co-founder, chairman and CEO of Countrywide Financial -- Mr. No-Doc himself -- Angelo Mozilo.

Prince left his throne at Citi in November 2007 amid a mountain of subprime losses that are still piling up. Investors were getting frustrated with him when the stock was at $50 early that year, having made no significant gains during his tenure, which began in 2003. The stock closed Dec. 24 at $6.78 but Prince left with a parting gift reportedly worth roughly $40 million for a job ... well done?

O'Neal was ousted under similar circumstances in October 2007 after holding the reins at Merrill for five years. Through the beginning of 2007, his performance far outpaced that of Prince in terms of shareholder returns, but once the credit took hold, shares of Merrill fell off a cliff wiping out over three years' worth of gains. Ultimately, in order to save the firm, O'Neal's replacement John Thain had to hand over the keys in September 2008 to Bank of America (BAC) CEO Ken Lewis.

Still, Merrill said at the time of his departure that O'Neal would be charging shareholders about $161.5 million in stock awards and benefits on his departure.

But Angelo, the Orange of Countrywide, was the star of Waxman's show. On Jan. 11, 2008, a week before his appearance before Congress, Mozilo agreed to sell CFC to BofA for $4 billion, or $7.16 a share -- an 83% discount to where its shares stood at the same time the previous year.

Prior to the sale, CFC and its perpetually-tanned CEO were darlings on Wall Street and Main Street, beating analyst profit estimates and giving often unqualified people the gift of home ownership. In 2007, however, it became clear amid a spike in home foreclosures that Countrywide's loose lending practices were behind its success, and they would ultimately be the cause of its downfall. Mozilo soon became the prime target for critics of the predatory lending practices that rose to prominence in recent years.

Mozilo bid farewell to CFC at the end of June after the sale closed, but left far from empty-handed. From 2005 to 2007, Mozilo sold much of his CFC stock realizing $291.5 million in profit.

Angelo, did you really believe that you could leave your shareholders in a tailspin and sail off into the sunset in your golden parachute without paying a visit to the people's house? After all, the "country" in Countrywide is a democracy, and 2008 was an election year.

Update 12/26: Several lawmakers and Congressmen have since been proven to be on the so-called "Friends of Angelo" list, making them privy to cut rate mortgage loans . They have all since scurried away from their former friend, leaving Mozilo all alone to roll around in his millions and watch the nation's subprime foreclosures mount.

DUMBEST OF 2008 #8

Bear's Cayne: Up in Smoke

By Nat Worden , 03/20/08

Where was Jimmy Cayne when his firm was collapsing last spring? You guessed it: he was playing bridge.

The former CEO and largest shareholder of Bear Stearns was at a bridge tournament in Detroit when the bank began to unravel. At the time, Cayne owned or controlled about 7 million shares of Bear Stearns stock. His stake was worth over $1 billion in January and in March was briefly worth about $14 million at the firm's then $2-a-share purchase price.

Let's hope the 74 year-old had a higher time at the card table than he did in the stock market last week.

Bear Stearns -- trading at close to $80 a share at the beginning of March -- was acquired in a fire sale for a stunning $2 a share by JPMorgan Chase (JPM), with $30 billion in emergency funds provided by the Fed. Although the bid was later raised to $10, more out of sympathy than necessity, the deal came less than three days after the Fed announced it would attempt to bail out the company, which proudly abstained from the 1998 bailout of Long Term Capital Management out of a sense of high principles.

The shocking disintegration of a major Wall Street investment bank concludes a chapter that began in the summer of 2007 when Cayne made headlines by being incommunicado at a bridge tournament while two hedge funds heavily invested in mortgage securities collapsed. The Wall Street Journal subsequently reported Cayne's affinity for smoking in public bathrooms.

Following that bridge tournament, Bear Stearns attempted to dump its junk mortgage securities onto the public in an initial public offering of a financial company that the firm called Everquest Financial. Cayne eventually lost the top job to Bear investment banking star, and his former bridge partner, Alan Schwartz, in January 2008, as he retired to the role of non-executive chairman.

Schwartz, however, could not turn the ship around in time. When trouble began in March, Schwartz departed a Bear Stearns media conference to do a damage-control interview on CNBC.

"Bear Stearns' balance sheet, liquidity, and capital remain strong," Schwartz declared on the airwaves. "Our liquidity position has not changed at all, our balance sheet has not changed at all."

Two days later the firm said its "liquidity position in the last 24 hours had significantly deteriorated."

Within 48 hours, the place was sold to JPMorgan for a mere $236 million--less than the company paid its five highest officers from fiscal 2004 through 2006, according to The Wall Street Journal.

Eight years prior, Cayne mused that he might consider selling the 85-year-old investment bank for four times what it values itself on its books.

Ultimately, that goal proved a bridge too far.

Update 12/26: On March 27, 2008, Cayne sold his entire stake in Bear Stearns, over 5.61 million shares, for $10.82 a share. This stake was sold prior to the vote on the renewed $10 bid by JP Morgan for Bear Stearns. When asked by Fortune magazine in August how he felt about selling the 85 year old firm, Cayne responded "I felt nothing."

DUMBEST OF 2008 #7

Not Dead Yet

By Robert Holmes, 08/29/08

Reports of Steve Jobs' death have been greatly exaggerated, this time courtesy of Bloomberg.

In August, the financial news giant accidentally published an unfinished 17-page obituary for the Apple (AAPL) CEO before quickly pulling the story.

In a retraction notice Bloomberg called the errant posting an "incomplete story" -- presumably because Jobs is still, you know, alive.

Lucky for Bloomberg -- and Apple shareholders especially -- the premature obituary didn't cross the financial newswires until after the stock market had closed for the day. Still, the report was unsettling for investors who care greatly about Apple's CEO and plans for his succession.

Jobs' health is a particularly delicate subject. Jobs has previously battled pancreatic cancer, but his frail appearance during the launch of the iPhone 3G earlier this year ignited speculation that he is continuing to battle the disease.

Of course, it's natural for news organizations to prepare obituaries for such high-profile names well in advance. But for a company as infamous for micromanagement as Bloomberg, a gaffe like this is especially shocking.

For Jobs, though, there is one small consolation in combing through those 17 pages. You've got a once-in-a-lifetime opportunity to edit your own obituary.

Update 12/26: The issue of Jobs health reappeared Dec.16 when Apple announced its iconic leader won't be delivering the highly anticipated keynote speech at the annual Macworld computer trade show in January. The company's stock tanked when it said Philip Schiller, a marketing executive, will stand in for Jobs. He better look darned good in a black turtle neck sweater.

DUMBEST OF 2008 #6

Yahoo!'s New Search

By Gregg Greenberg, 11/07/08

It's time again for Yahoo! (YHOO) to search for salvation.

Google (GOOG) got sick of the antitrust battle and abandoned its planned advertising partnership, leaving Yahoo! in the lurch.

David Drummond, Google's chief legal officer, wrote on a company blog that while disappointed the deal was dead, "we're not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on."

No kidding. The whole idea of teaming up with Yahoo! was the least innovative idea ever to arise from a company that prides itself on doing things differently.

Maybe this was all some part of Google CEO Eric Schmidt's grand design to rid the company of a competitor?

As for Yahoo!, the company's prodigal CEO, Jerry Yang, returned, cap in hand, to Microsoft (MSFT) to bail him out. But in November, Yahoo!'s stock was trading at half the value it had earlier in the year when Microsoft was offering $33 a share.

Yang should have known his wild plan to escape Microsoft would never work out. All he had to do was Google "antitrust" and they would have seen the futility, let alone stupidity, of the whole plan.

Update 12/26: Yahoo! shares continued to slide through the month of November, falling below $9. On November 17th the WSJ reported Yang was stepping down. The stock has since risen by more than 40% to $13. The board obviously should have yanked Yang a long time ago.

DUMBEST OF 2008 #5

Schwarzman Bashes Birthday

By Gregg Greenberg, 11/07/08

The party of the century is giving Steve Schwarzman the hangover of a lifetime.

The CEO of private equity giant Blackstone Group (BX) finally admitted in early November at a New York press conference that his multi-million dollar 60th birthday celebration was a mammoth public relations mistake. The garish gala, held on Valentine's Day 2007, featured British rocker Rod Stewart, comedian Martin Short, singer Patti LaBelle, two Harlem choirs and a marching band.

"Obviously, I wouldn't have wanted to do that and become some kind of symbol of that period of time -- who would ever wish that on themselves? No one," said Schwarzman at the conference.

Schwarzman was also quick to point out that his 61st birthday party was held this year with far less fanfare.

But it sure was one heck of a fiesta, wasn't it Steve? It was a business blowout second only to former Tyco (TYC) chief Dennis Kozlowski's infamous Sardinia bash.

Unfortunately, aside from bad taste, Schwarzman's party also suffered from bad karma. Blackstone went public a few months later at the peak of the buyout boom at $31 a share. The stock closed Dec. 24 at $5.75 after trading as low as $4.15 a share in November.

And it's going to get worse for the former private equity princes, says Doug Kass of RealMoney Silver, a premium Web site from TheStreet.com. Kass contends that a slew of pension fund capital calls and unbearable debt burdens make "private equity the next shoe to drop."

That may be good news for Schwarzman. He can use the shoe to repeatedly kick himself for being so stupid.

Update 12/26: Blackstone shares traded below the $6 barrier last week as the pummeling of private equity funds continues unabated. No plans have been released about Schwarzman's birthday plans for this coming February. But if this keeps up, he may have to settle for Chuck E. Cheese's.

DUMBEST OF 2008 #4

Lamenting Lehman

By Gregg Greenberg, 09/19/08

"It's a tragedy ... Bobbie (Lehman) is spinning in his grave."

That's what long-time Lehman Brothers partner Herman Kahn said following the firm's sale to Shearson/Amex in 1984, according to Greed and Glory on Wall Street: The Fall of the House of Lehman by Ken Auletta.

If he was rolling over then, one can only imagine what Bobbie's doing now. He should be haunting former CEO Dick Fuld for driving the 158-year-old firm into the ground.

With so much stupidity still swirling around Lehman's sudden demise, the Five Dumbest Lab selected a few items too good to pass up before saying our final goodbyes:

Leaving on Top: Institutional Investor awarded Lehman Brothers the top spot in September in its annual All-America Fixed Income Research Team rankings, defending its title for the ninth straight year.

Bove's Bungle: "I still believe that this is one of the best companies on Wall Street and that it has value well beyond its current stock price. Therefore, the stock remains a buy," said Ladenburg Thalmann analyst Dick Bove on Sept. 11 with the stock's price at $7.25 and sinking.

Asleep at the Board: What's especially revealing about Lehman's demise was the average age of its 10-member board: 74.3 years. Their backgrounds are even more revealing. Counted among the board are such business bastions as a theater producer and a Navy admiral. Anyone still wondering why things fell apart? We won't even ask if anyone believes that they earned the $360,000 in average compensation they received.

Waxman Pathetic: "Our hearings will examine what went wrong and who should be held to account," Henry Waxman, the Democratic congressman from Los Angeles, said in September when he announced hearings that will include Dick Fuld and former AIG CEOs Robert Willumstad and Maurice "Hank" Greenberg. That was the kind of decisive response we've come to expect from Congress.

Fuld's Farewell: "The past several months have been extraordinarily challenging. For some of you, the firm has been your home for decades. For others, less than a year. For all of us, it has been far more than a place of employment. It has been a source of pride." Email from Richard Fuld in September, CEO of Lehman Brothers, 1994-2008.

Yes, Dick, you've got plenty to be proud of.

 

Update 12/26: Fuld refused to sell Lehman to save it and when he finally changed his mind, it was too late. In November, Fuld and his wife sold 16 works of art at Christie's for $13.5 million. Unfortunately, the auction house guaranteed the former Lehman CEO $20 million for the lot, thereby taking a multi-billion bath on the deal. Another case of art imitating life. (The most successful Fuld piece? Gorky's Study of Agony I sold for $2.2 million. Ah, the irony - and the stupidity.

DUMBEST OF 2008 #3 (TIE)

AIG's Hunting Party

By Gregg Greenberg, 10/17/08

 

American International Group (AIG) went on the government's dole for $123 billion, but that doesn't mean its executives can't have a jolly old time.

A handful of top executives from AIG allegedly racked up an $86,000 tab during an October English hunting trip, even as the New York-based insurer was lobbying for an additional $37.8 billion from the Federal Reserve.

AIG spokesman Peter Tulupman at the time that the event had been planned "months before" the Fed's loan to AIG, adding, "We regret that this event was not canceled."

Perhaps sincere regret carries a little less weight in these extraordinary times. What taxpayer wasn't overjoyed with learning that he or she helped sponsor another boondoggle, this one at a $440,000 price tag, for top AIG insurance agents at a posh California resort in September -- just days after the U.S. government stepped in to save AIG with $85 billion?

White House Press Secretary Dana Perino called that event "despicable."

This latest one, however, we'll call just plain stupid.

Update 12/26: On Nov. 10, just a few days before requesting an additional $40 billion from the Federal government, ABCNews reported that the insurer spent $343,000 on a conference at a lavish resort in Phoenix, Arizona . Later that month, they got their money from the Treasury. Party on, Garth!


GM Jettisons Jet

By Gregg Greenberg, 11/28/08

 

General Motors (GM) is having trouble selling cars, but maybe it will have better luck unloading a pair of airplanes.

The CEOs representing the Big 3 automakers flew into a storm of criticism in late November for taking private jets to Washington, D.C., to lobby Congress for a multibillion dollar-bailout package. The irony was so delicious that Rep. Gary L. Ackerman (D., N.Y.) said it's "almost like seeing a guy show up at the soup kitchen in a high hat and tuxedo.''

GM Chief Executive Rick Wagoner certainly got the point, although he would not publicly admit it. The nation's largest automaker announced later that it was already in the process of returning two of its leased corporate jets, even before Wagoner's humbling -- and pricey -- round trip to Capitol Hill.

So the announcement that GM was jettisoning its jets was pure coincidence?

Sure, and we have a bridge to sell you!

GM started the year with lease contracts on seven jets, but cost-cutting eliminated two in September 2008, before this week's decision to ditch two more. Ford's (F) air fleet currently numbers five jets, which the company owns. A Ford spokesman said the company is still trying to figure out what to do about its air travel plans.

Maybe Wagoner and Ford CEO Alan Mulally can hitch a ride on Chrysler CEO Robert Nardelli's luxury jet on their next fund-raising journey to Washington.

Nardelli famously pocketed more than $210 million in severance when he left Home Depot (HD) to join Chrysler's parent Cerberus, sneering at shareholder protests in the process. Nardelli obviously doesn't care about keeping up appearances, even when prostrating himself for public money.

So in case you didn't get the message in Detroit, it's time to cool your jets.

Update 12/26: The Big 3 chiefs smartened up and chose a cheaper form of transportation for their return trip to Capitol Hill two weeks later. Nevertheless, they still failed to convince Congress to give them the billions they need to survive. President Bush ultimately rode to their rescue in late December with a $17.4 billion bridge loan. But will it lead to nowhere? We here at The Five Dumbest Research Lab plan to follow these developments, if any, very closely.

DUMBEST OF 2008 #2

Christopher Cox Clouseau

By Gregg Greenberg, 12/19/08

Have no fear Madoff victims. Christopher Cox is on the case.

Securities and Exchange Commission Chairman Cox made his first major statement two weeks ago concerning the alleged $50 billion Bernard Madoff Ponzi scheme since the case was brought to light Dec. 11.

Cox, who will soon be replaced as SEC chief by Barack Obama nominee Mary Schapiro, assured the public that "every necessary resource" at the SEC has been dedicated to pursuing the investigation, protecting customer assets and holding those who may have been involved accountable.

Furthermore, while he can't share too much about the ongoing investigation, Cox revealed that "progress to date indicates that Mr. Madoff kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators."

Wow Chris! With detective work like that, you'll crack this case in no time.

Are you suggesting Madoff not only lied to the millionaires, charities, hedge funds and mom and pops, but to the SEC as well? Who would've guessed?

Sorry Chris, but you don't get off that easy.

Credible and specific allegations regarding Madoff's shenanigans were repeatedly brought to the attention of SEC staff going all the way back to 1999, but the commission failed to act on them. And even in your lame mea culpa, you admit that the "staff relied upon information voluntarily produced by Mr. Madoff and his firm" instead of getting off their duffs and doing some actual legwork.

Here's our idea to rectify the situation, and hopefully you won't ignore it like you did the many opportunities you had to nab Madoff. Instead of asking the SEC's inspector general to review the internal policies that led to this catastrophe, we suggest you hand the case to Inspector Clouseau.

Surely the bumbling French detective could do a better job than you or your commission.

Update 12/26: Bernard Madoff is out on $10 million bail, holed up with lawyers and bodyguards in his Upper East Side penthouse. Meanwhile, SEC agents are swarming Madoff's offices trying to piece together how they missed the largest fraud in Wall Street history when it was right under their noses. As for Cox, he'll soon be a memory -- a bad one -- on Wall Street once President Obama is sworn in.

DUMBEST OF 2008 #1

Credit Crunch Chaos

By Gregg Greenberg, 12/26/08

Brother can you spare a trillion?

Nearly every dumb event that took place in 2008 was rooted in some way to the ongoing credit crisis, thereby meriting it the coveted top spot on our list. The bubble-like extension and collapse of credit -- from simple charge cards to complex C.D.O.'s (Collateralized Debt Obligations, that is) -- refocused an investing public that traditionally seeks its economic answers from the stock market.

No, it was bonds that set the terrible tone in 2008. Bad bonds. And they had a license to kill.

The losses and writedowns announced by Morgan Stanley (MS) and Goldman Sachs (GS) last week brought the losses by financial firms in the U.S. to $678 billion since last year, while European banks and insurers have written down a further $300 billion, according to Bloomberg.

That's nearly a trillion dollars lost down the drain, alongside more than two hundred thousand financial jobs, all due to Wall Street's failed love affair with mortgage-backed bonds.

Don't have enough money to buy that McMansion? No problem. Countrywide will give you a subprime loan. What do they care? They are just selling it to Bear Stearns or Lehman Brothers -- may they rest in peace -- where it can be wrapped up into a toxic sausage called a C.D.O. And once it's wrapped nice and tight, Moody's (MCO), Standard And Poor's or one of the other crooked ratings agencies will bless it with a pristine AAA rating so it can be sold to a European bank or some other sucker overseas stretching for a slightly better yield.

That's how it worked. As long as the mortgage music was playing, Wall Street kept "dancing", to borrow a phrase from then Citigroup CEO Chuck Prince in the summer of 2007. (Good Ole Chuck boogied off later that year with $42 million bucks that shareholders will never see again.)

And it kept working that way until, like a financial Frankenstein, the monster turned on its creator, leveling every investment bank, commercial bank and hedge fund in its path. Financial firms fell, one by one, choking on the bad loans they brought to market.

But now the mess of 2008 is almost past, but it's not quite over. So far, what's left is a nation of battered banks, foreclosed homes and tapped out consumers -- who, let's be honest, were complicit in their own way for being swept up in a national wave of greed.

The banking industry, razed to the ground, now depends on Washington to bail it out and build it back up. And like the good public servants they are, Congress and the President are coming through, shoveling hundreds of billions of taxpayer dollars to the very same banks that caused this crisis. Their mandate: lend or else, no matter if it makes sense.

In other words, do the same damn thing that started this crisis in the first place.

Talk about dumb. 2008: Rest in peace.

 

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