The Five Dumbest Things on Wall Street This Week

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The Five Dumbest Things on Wall Street: March 7

Nat Worden

1. Patriots Lose to a Giant

Remember during the dollar's big rally back in 2005, when the usual parade of nitwits took to the airwaves to criticize Warren Buffett's bet against the greenback as anti-American?

Honesty has never been well received on Wall Street, and no great business leader has been more candid and outspoken than the head of Berkshire Hathaway BRK.A about the not-so-long-term challenges facing the U.S. economy and its currency.

"Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S.," said Buffett in his latest annual letter to Berkshire shareholders, reprising an argument that he has made consistently for over a decade. "Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the rest of the world. And over time, that puts pressure on the dollar."

Unlike many pontificators, the world's most successful capitalist has put his money where his mouth is, starting in 2002. Three years later, his wager that the dollar would decline in value had swelled to $21 billion amid a greenback rally that inspired a chorus of pundits to declare him wrong and even attack his character. In doing so, they started down a well-worn path littered with the carcasses of their countless, misguided, Buffett-doubting predecessors.

Buffett's "contempt for U.S. economic freedoms" led him into macroeconomic forecasting, a place where the legendary stock-picker had no business being, shouted Wall Street's right-wing patriot patrol. He's mixing politics and money, they said, citing his contention that the fiscal policies of the Bush administration have led to unsustainable twin deficits in the federal budget and international trade. Then they all donned flight suits and pranced around the deck of an aircraft carrier under the banner "Mission Accomplished."

The Wall Street Journal editorial page -- noting in May of 2005 that Berkshire's dollar bet resulted in first-quarter investment losses of $310 million -- said smugly that "Mr. Buffett is playing with his own company's money, and as a billionaire he can afford to lose it."

Uh huh, or the Oracle of Omaha could do what he has done for the last half-century and deliver outstanding returns for shareholders. The dollar rally of 2005, needless to say, proved short-lived, and its cheerleaders are now choking on cold freedom fries. The greenback is trading at new record lows while the Federal Reserve pumps more liquidity into the economy to head off recession and the federal deficit continues to balloon. The Associated Press reported Tuesday that Japan's economic minister described the dollar's recent declines as "abnormally rapid."

For his part, Buffett reports that Berkshire's direct currency positions have yielded $2.3 billion in pretax profits over the past five years. And unlike all his detractors who defend the failed status quo by insulting him in order to avoid a real debate that they would surely lose, Buffett actually offers a solution to the U.S. trade problem. He advocates the use of import certificates to subsidize U.S. exporters while driving up the cost of imported goods.

"Perhaps there are other solutions that make more sense than mine," Buffett said. "However, wishful thinking -- and its usual companion, thumb-sucking -- is not among them."

Dumb-o-meter score: 95. Patriotism 101 class for thumb-suckers dismissed. Again. 2. GM On the Fritz

Typically, a major U.S. company in the midst of a do-or-die restructuring will leave a few key roles open in its top executive ranks for extended periods of time, just to give everyone some room to breathe and perhaps exercise a few stock options.

That's why investors were puzzled this week when General Motors GM named its chief financial officer, Frederick "Fritz" Henderson, as its new president and chief operating officer, positions that had previously gone unfilled. What was the board of directors thinking?

GM's leading director, George Fisher, told the Wall Street Journal that the change is "really a continuation of what we've been doing."

Phew. With GM's stock price down 27% for the past year, its 49%-owned finance business in turmoil and its U.S. sales in decline amid soaring gas prices and the threat of a consumer-led recession, the last thing investors want is for GM to tinker with its winning formula.

In his new role, Henderson will have command over the day-to-day operations of the company's global auto operations. For his part, GM CEO Rick Wagoner will have more free time now to roam the earth and lobby governments on behalf of GM's sacred right to lag its Asian-based competitors in fuel efficiency in addition to sales performance and profitability.

While acknowledging that GM's top executives have been "somewhat stretched," Wagoner told the Journal that the change had nothing to do with the fact that he's the worst-performing CEO in GM history. He said it was "something I'd been thinking about for a while and talking to the board about."

Perhaps that boardroom chat began back in 2005 when Wagoner predicted GM would earn $4 to $5 a share for the year, only to later wind up with a loss of $10.6 billion.

Or maybe it began a year later after Wagoner won a boardroom battle to protect his job by convincing directors to side with him over billionaire investor Kirk Kerkorian, who wanted to merge GM with Carlos Ghosn's Renault-Nissan. Since then, GM shares have lost one-third of their value.

Kerkorian's representative on GM's board, Jerry York, resigned his seat after the battle and sent a scathing letter to the company that questioned whether the fundamental problems with GM's business model were being addressed in its turnaround.

York said he did not find "an environment in the board room that is very receptive to probing much beyond the materials provided by management." He wasn't criticizing Fisher, was he?

"I have never felt so good about the direction of GM," Fisher told the Journal this week.

Dumb-o-meter score: 91. No, I didn't think so. 3. Marty Whitman's Victim Card

In a battle over the bond insurers, one high-profile value investor will walk away with egg on his face.

In one corner, the legendary Marty Whitman of Third Avenue Funds revealed this week that he recently boosted his stakes in MBIA MBI and Ambac ABK. He said in a letter to his clients that there's "much profit to be made in" both companies, whether they continue as going concerns or write no new policies and sell off their existing business.

Whitman bought $326 million of the $2.6 billion that MBIA recently raised in new capital through note sales.

"It ought to qualify easily for an AAA rating with a $17 billion claims-paying ability," said Whitman. "If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business."

In the other corner is Bill Ackman of Pershing Square Capital, who has maintained since 2002 that triple-A credit ratings for MBIA and Ambac are fraudulent. Ackman has big short bets on both companies, arguing that neither has enough capital to cover claims that are in store on their massive structured finance portfolios, which are largely tied to the mortgage market.

While Ackman has lashed out at the bond insurers and the credit ratings agencies that depend on their business, Whitman has taken a page from the bond insurers' playbook by laying down the victim card and blaming Ackman for their troubles.

"MBIA is being victimized by an apparently well organized bear raid headed by" Ackman, said Whitman. "While the bear raiders have been helpful to Third Avenue, in making it easier to acquire MBIA common [stock] at depressed prices, the bear raiders might have the ability to adversely affect the going concern attributes of MBIA, given the possible capriciousness of rating agencies and regulators."

As far as well-organized bear raids go, this one has been pretty successful so far. Shares of MBIA have collapsed over the past four months, losing 72% of their value. Meanwhile, Ambac is down 87%.

After weeks of anticipation of a bailout plan for Ambac, the company announced Wednesday that it will try to sell $1 billion in common stock and $500 million worth of equity units -- notes that must be converted to common stock in May 2011. That fell short of the $2 billion that it was expected to raise, and it included no commitments from bankers and no plan to split its safe municipal bond business away from its toxic structure finance portfolio.

"In this offering, we are targeting our core investor base, the long term holders of our stock, who have been loyal to Ambac," said Ambac CEO Michael Callen.

Shares of Ambac responded by losing a quarter of their value over the next two trading sessions. MBIA shares shed 11%. Oh, and both companies have disclosed that they're finding no new business in 2008.

Dumb-o-meter score: 85. Marty, how do you like your eggs?

4. Citi's Man in Dubai

Given the geopolitical strains that exist between the U.S. and the Middle East these days, many Americans have expressed unease about letting sovereign wealth funds run by Arab governments buy ownership stakes in the nation's leading financial institutions.

But the more pertinent question may be whether these Arab nations are dumb for pouring their oil money into our floundering banks.

Sameer al-Ansari, head of Dubai's sovereign wealth fund, said this week that Citigroup C will need far more than the $22 billion in fresh capital it has raised recently from foreign governments such as Abu Dhabi, Kuwait and Singapore.

"It will take a lot more than that to rescue Citi and other financial institutions," said Dubai International's chief executive at a private-equity conference in Dubai, according to Bloomberg News.

Al-Ansari's fund has reportedly invested in HSBC HBC but not in Citi, which logged more than $20 billion in losses last year on bad loans and investments.

Merrill Lynch analysts expect Citi to take $15 billion more in mortgage-related writedowns in the first quarter and to post a loss of $1.66 a share.

Meanwhile, The Wall Street Journal reported Thursday that the finance giant has started shedding clusters of U.S. branches in places where the bank lags its rivals. Its new CEO, Vikram Pandit, is trying to get the company out of slow-growing and especially risky businesses.

Pandit maintains that the company is "financially sound," while its stock shed 10% this week to make new nine-year lows.

The Associated Press cited an unnamed source familiar with Citi as saying the bank is not actively seeking more cash from sovereign wealth funds, having decided that $12.5 billion was enough.

Dumb-o-meter score: 79. The stock market seems to be going with Dubai on this one.

5. WaMu Moves the Goal Posts

Since the long-awaited congressional hearing on executive compensation practices in the housing bust is finally happening today, lawmakers may want to consider extending a last-minute invitation to someone from Washington Mutual's WM board of directors.

With Wamu's stock down 70% over the last six months, the company's board has been busy finding new ways to reward its failed management at the expense of shareholders who have already lost big.

The Seattle-based home lending giant said in a regulatory filing this week that it will calculate 2008 bonuses by considering factors such as operating profit and noninterest expense, without taking into effect housing-related loan losses and expenses tied to real estate foreclosures.

This from a company that has been one of the hardest hit by the credit and housing busts, reporting a $1.87 billion loss for the fourth quarter alone. Those results included a $1.53 billion add-on to the company's reserves for future loan losses.

The Wall Street Journal reported that WaMu's change in compensation policy "effectively shields the pay of chairman and chief executive of the thrift, Kerry Killinger, and more than 100 other executives from the continuing mortgage fallout."

"They've cost their shareholders a lot of money," one shareholder told the Journal. "Bonuses should be given to the executives who enhance shareholder value, not destroy it."

To be fair, Killinger turned down his 2007 bonus of $1.2 million because of the company's dismal performance, but according to the company's current plans, he stands to get a 2008 bonus equal to 365% of his base salary even if WaMu's mortgage-related losses get worse.

All this comes as the issue of banking pay has become increasingly controversial and salaries in the industry have exploded in this decade compared with other sectors of the economy. And some of the biggest payouts have been made by the companies that are at the heart of the recent credit turmoil in structured finance and mortgage lending.

The House Oversight Committee, chaired by U.S. Rep. Henry Waxman (D., Calif.), invited Countrywide CFC chief Angelo Mozilo, former Citi CEO Chuck Prince and former Merrill Lynch MER CEO Stanley O'Neal to testify today on the subject of their lavish pay packages. The hearing has been delayed twice for scheduling issues, but if it finally happens, you can look forward to a discussion here next week.

Dumb-o-meter score: 68. Is it too late to get someone from WaMu at that hearing?