The Five Dumbest Things on Wall Street This Week

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The Five Dumbest Things on Wall Street: Feb. 15

Nat Worden

1. Kill The Messenger

With its stock down 80% over the last year, MBIA (MBI - Cramer's Take - Stockpickr) came to Washington, D.C., this week to put the blame where it always seems to belong: on someone else.

This time, the creaking bond insurance giant pointed the finger at activist hedge fund manager Bill Ackman of Pershing Square Capital, who estimates that MBIA faces more than $11 billion in potential losses on insurance contracts that it underwrote for structured finance securities tied to risky mortgage loans.

Ackman publicized his bearish case on MBIA and disclosed his short position on the company way back in 2002, and was roundly ignored or ridiculed on Wall Street. He recently told reporters that when he presented his case to MBIA executives years ago, they threatened him, in an attempt to keep him from making his analysis public.

MBIA's complaints about Ackman led to an investigation into his fund's activity by then-New York Attorney General Elliott Spitzer in 2003. By Ackman's account, Spitzer found no evidence of any wrongdoing on his part. In fact, he took an interest in Ackman's analysis of the bond insurance industry and the fraudulent activities that he alleges MBIA and its counterpart, Ambac (ABK - Cramer's Take - Stockpickr), have engaged in. (Spitzer could not be reached to confirm this account, but he was also in Washington this week, calling for a government bailout for the bond insurers, aimed at preventing financial catastrophe).

Forgetting about the First Amendment and other nagging details, MBIA told lawmakers and regulators that the practice and dissemination of "half-truths and misleading information" by short-sellers should be "investigated and curtailed."

But now everyone is listening to Ackman because he has far more credibility than the bond insurers. As MBIA noted in its testimony, the hedge fund manager appeared at the congressional hearing this week as an "industry expert."

"Mr. Ackman is in fact not involved in the industry in any capacity except as that of a short-seller, and, accordingly, MBIA questions the characterization of Mr. Ackman's expertise," said the bond insurer.

Dumb-o-meter score: 95. It's a sad commentary when someone not involved in an industry has more expertise on it than those leading its largest company.

2. Adventures in Web Valuations

In 2001, Google (GOOG - Cramer's Take - Stockpickr) co-founders Sergey Brin and Larry Page broke bread with former Yahoo! (YHOO - Cramer's Take - Stockpickr) CEO Terry Semel and discussed a possible acquisition of their fledgling search firm, according to the Sunday Telegraph.

The newspaper reported that Semel balked at the price demanded by the youngsters: $3 billion.

Seven years later, Google is worth more than $167 billion, and its stock price has risen by about 30% since the beginning of 2006. Before Microsoft (MSFT - Cramer's Take - Stockpickr) offered to buy it for $45 billion on Feb. 1, Yahoo was valued in the market at just $27 billion. Its stock had dropped 54% since the beginning of 2006.

Microsoft, with its iconic founder Bill Gates off preaching "kinder capitalism" with U2's Bono, somehow thinks it's a good idea to buy Yahoo! at a whopping 62% premium in the hopes that it can compete with Google in the search business. Plus, it bears mentioning that "Google" has become a verb in the intervening years, while Yahoo! remains an exclamation used by Homer Simpson when he sees a doughnut.

By making an unsolicited bid for Yahoo! in his quest to get out of his predecessor's shadow, Microsoft CEO Steve Ballmer may think he's playing Rupert Murdoch to the Web's Dow Jones, but it's becoming increasingly clear that he's about to get played himself.

Yahoo! founder Jerry Yang, who now holds the reins at the company again, rejected the bid on the preposterous grounds that the offer was undervaluing his baby. One might expect Yahoo!'s shareholders to be annoyed with the decision, but remarkably, Microsoft shareholders sound far angrier about their role in this sordid affair because they know that the PC giant is probably going to sweeten the pot.

"I want Microsoft to say 'sayonara Yahoo!' and walk away," Robert Olstein, who owns roughly 1 million Microsoft shares, told Reuters. He reportedly just wrote a letter to the company, saying "under no circumstance should you raise your price."

Murdoch himself, who won a seat at the table in Silicon Valley when he acquired MySpace, is yukking it up at News Corp. (NWS - Cramer's Take - Stockpickr). After telling analysts on a recent earnings call that he has no intention of bidding on Yahoo!, News Corp. is now reportedly in talks with Microsoft's quarry about combining it with MySpace and giving News Corp. a 20% stake in Yahoo!.

It's unclear how this plan would compensate Yahoo! shareholders for passing up a 62% premium, but that's really beside the point. Like Google's recent idea of teaming up with Yahoo! on search advertising as a possible way to fend off the Evil Empire, the News Corp. talks will dissipate soon. That will leave Yahoo! entertaining some other crackpot scheme, while Ballmer twists in the wind as shareholders wait for him to cough up the goods.

"Microsoft will need to enhance its offer if it wants to complete a deal," said Bill Miller, the legendary investor at Legg Mason, which owns a 6.6% stake in Yahoo!. Dumb-o-meter score: 91. Yeah, what that guy said.

3. Newspaper Vigilantes United!

"There is nothing wrong with the New York Times Company that cannot be fixed with what is right with the New York Times."

So said Scott Galloway, Wall Street's latest warrior-poet, while promising to fix the woes of the newspaper industry in a letter to executives at the Gray Lady.

The latest shareholder activist being fended off by New York Times (NYT - Cramer's Take - Stockpickr), Galloway is a brand strategy guru with Firebrand Partners who has financial backing from hedge fund Harbinger Capital.

Scott Galloway models during a Johnnie Walker fashion show in 2006.

Harbinger, which is pushing to nominate four directors to the company's board, ratcheted up its campaign this week by disclosing Monday that its fund based in the Cayman Islands more than doubled its stake in New York Times to around 10%, making it the company's second-largest institutional shareholder. That came after the investor group met with the company's management in what it called a "productive and positive dialogue."

The Times fired back Tuesday by nominating two high-caliber candidates of its own to be new board members: Dawn Lepore, an eBay (EBAY - Cramer's Take - Stockpickr) director who is CEO of drugstore.com (DSCM - Cramer's Take - Stockpickr), and Robert Denham, a partner at Munger, Tolles & Olson, a law firm founded by Charlie Munger -- a top lieutenant for Berkshire Hathaway's (BRK-A - Cramer's Take - Stockpickr) Warren Buffett.

Unlike Hassan Elmasry, the fund manager from Morgan Stanley Investments whose previous efforts to shake up the Times failed, Galloway is trying to make nice with the Times, primarily by not pushing for an end to the company's dual-class share structure that gives the Ochs-Sulzberger family control over the newspaper publisher. But despite his warm and fuzzy approach, Galloway is a weight-lifting shareholder mercenary with a reputation for brash talk and a take-no-prisoners attitude.

"Galloway is not afraid of anybody or anything," says a longtime business associate who expressed admiration for him. "He's not the guy who shows up at board meetings for a free dinner wearing a blazer and pats the CEO on the back and says, 'Good job,' and collects some options."

Galloway stumbled into shareholder activism in 2004 when he was booted off the board of RedEnvelope (REDE - Cramer's Take - Stockpickr), an online retail outfit that he founded. He battled his way back onto the board two years later, but since then, the company's stock has plunged by 82%.

The last time he teamed up with Harbinger, Galloway won a board seat at Gateway in December 2006, when the stock was trading around $1.90. Subsequently, the stock tumbled as low as $1.12 before the computer seller was finally acquired by Acer last August for ... um ... $1.90 a share.

Dumb-o-meter score: 85. "There is nothing wrong with Gateway that can't be fixed with what's right with Gateway," Galloway said in a letter to Gateway management in 2006. Sound familiar?

4. Research In Motion Sickness

In the digital communications age, news gets old quick, especially when you're the CEO of a leading mobile communications provider that just had a network breakdown in North America.

Research In Motion (RIMM - Cramer's Take - Stockpickr) admitted this week that it suffered a three-hour network disruption in its BlackBerry email service for about 8 million North American customers on Monday.

It was the second mass breakdown of its network in the span of 10 months, and unfortunately for the company, it came when the entire telecom industry was gathered in Barcelona, Spain, for the Mobile World Congress. Awkward?

Asked about the costs of the service interruption, RIM co-CEO James Balsillie told Bloomberg TV the "relevant issue'' of such incidents is the reputation of the company and its relationship with customers.

"It was an intermittent delay, a couple of hours," RIM co-CEO James Balsillie told CNet after delivering a key-note speech to the conference on Wednesday morning for a panel called "Over The Top Services."

"It's old news. It happened days ago," said Balsillie.

Dumb-o-meter score: 79.We've forgotten about it already, Jim.

5. About That Mortgage Risk

Risk reassessments can be a real downer for accountants.

Take the famed auditing house PricewaterhouseCoopers, for instance.

Having signed on the dotted line at various credit crunch stars like MBIA for years, the firm appears to have had a sudden epiphany at insurance giant AIG (AIG - Cramer's Take - Stockpickr).

Still reeling from past accounting scandals, AIG announced Monday it will be forced to write down the value of financial instruments tied to mortgages after PWC said it had found "material weakness" in its accounting systems.

Remember that pesky $1 billion loss the company announced late last year for the months of October and November? Well, let's make it a cool $4.9 billion instead and call it even. Oh, and as for December -- we'll have that for you in a few weeks -- should be a doozy.

Shares of AIG responded to the announcement by dropping almost 12% in one day. Suddenly, the company's previous statement that it had "little to no exposure" to asset-backed commercial paper, structured investment vehicles or collateralized debt obligations tied to residential mortgage-backed securities had little to no credibility.

In a regulatory filing, AIG said it has yet to determine the full extent of "the amount of the increase in the cumulative decline in fair value" of its super senior credit default swap portfolio. Usually, investments in a company's portfolio are valued using a "mark-to-market" approach, which requires auditors to use whatever valuation is given to an investment in the market at the time of the audit.

In the case of a complex derivative security, however, for which there is no liquid market, accountants are basically paid to make something up using some assumptions that few people really understand. Nowadays, many of the assumptions that have been long made on securities tied to the U.S. housing market are under review, so to speak.

On Tuesday, AIG said in a statement that it continues to believe that losses on super senior credit defaults swaps "are not indicative of the losses [AIG Financial Products Corp.] may realize over time."

Dumb-o-meter score: 68. Maybe this time, they'll be right. Just don't hold your breath.