The Five Dumbest Things on Wall Street This Week

Return to Article

The Five Dumbest Things on Wall Street: March 14

Mike Taylor

1. Eli Lilly's Diabetes Problem

For pharma firm Eli Lilly LLY, a safe diabetes treatment is a no-go. But if another drug causes diabetes, greenlight the thing -- provided, of course, there's a healthy sales boost in the offering.

Last Friday, Lilly announced it would cease work with Alkermes ALKS on its AIR Insulin project for an inhalable diabetes treatment. Lilly stressed in a press release that its decision was not informed by "observations ... relating to the safety of the product," but instead by "a thorough evaluation" of AIR Insulin's "commercial and clinical potential." That's not surprising: Inhalable insulin is a laughingstock on Wall Street. MannKind MNKD plummeted this week on concerns about its breathable insulin project.

To be sure, commercial concerns never arose for Zyprexa, Lilly's No. 1 drug that treats bipolar disorder and schizophrenia. The drug generated $4.8 billion in revenue last year.

It's too bad, then, that the state of Alaska has some observations of its own about Zyprexa's safety. A day after Lilly touted the safety of the now-defunct AIR Insulin, an Alaska lawsuit revealed that Zyprexa causes weight gain and blood sugar changes, which for those unaware are two indicators for diabetes.

Diabetes specialist and former FDA reviewer Dr. John Gueriguian testified that Lilly should have disclosed Zyprexa's diabetes situation in 1998. Instead, Lilly waited until 2007 to slap strong warning labels on Zyprexa bottles. Patients who can no longer regulate their blood sugar would probably agree.

Dumb-o-meter score: 95. In an internal memo about Zyprexa, Eli Lilly told its drug reps not to bring up the diabetes problem to doctors: "We will NOT proactively address the diabetes concerns," the document said.

2. Spitzer Spit Out

This week, 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, on Monday, 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 on Sunday 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.

Dumb-o-meter score: 91. "This was a sophisticated and lucrative operation with a multitiered management structure," Spitzer said in 2004 of a separate illicit business he helped shut down as a prosecutor. "It was, however, nothing more than a prostitution ring."

3. Joe Lewis' Second Thoughts

When so-called smart-money investors like billionaire Joe Lewis get dumb, "The Five Dumbest Things on Wall Street" gets dumbfounded.

Lewis is the world's second-largest shareholder in Bear Stearns BSC. Bear, in turn, is the world's second-largest underwriter of illiquid mortgage-backed securities. It stands to reason, then, that Lewis is doing some second-rate thinking as he contemplates expanding his stake in a poster child for the credit crisis.

In the past year, Bear shares have lived up to their name, falling almost 60% on mounting concerns about the investment bank's balance sheet. When Lewis started his position back in September, the company was trading above $100. Now, shares sit uncomfortably at around the $60 mark, staring down the precipice as rumors of liquidity concerns abound. Calling himself a long-term investor, the reclusive Lewis has maintained he's unfazed by the, ahem, questionable price action.

In his defense, Lewis has some cause for optimism. Bear CEO Alan Schwartz said Wednesday on CNBC that Bear expects to meet profit expectations. As CEOs sometimes do while struggling to ascertain what's going on at their companies, he dismissed rumored liquidity problems and said the broker's finances remain strong.

Analysts at Deutsche Bank beg to differ. They predict $1.9 billion in writedowns from Bear Stearns for the first half of 2008, and they're not alone in their bearish forecast. On Tuesday, Punk Ziegel analyst Richard Bove slashed his Bear price target to $45, saying, "The problem is Bear's business model is broken. ... They won't be able to get the earnings to the 2006 level for another five to six years. That's another good reason to sell the stock."

Dumb-o-meter score: 85. There's buying on dips, and then there's dippy buying.

4. Blackstone's Compensation Conundrum

On Wall Street, shoddy work rarely goes unrewarded for long. Exhibit A is BlackstoneBX CEO Stephen Schwarzman, who got $350.7 million in salary and an additional $4.77 billion in stock for his work in 2007.

Before readers get too indignant at the hefty sum, they should note that the stock probably won't stay that high. Shares have sunk from $31 to $16 since the company's June IPO. If they continue their descent, big Steve's wallet will be decidedly lighter by the time Blackstone celebrates its first birthday as a publicly traded company. And, as many of his shares will vest over the next several years, he can't cash in now, while Blackstone is still worth something.

Nevertheless, whoever bought some of the $684 million stake Schwarzman sold when the private equity firm came public might have a few questions for him. In advance of Blackstone's IPO, Schwarzman was reportedly living it up, dining on $40 crab legs and running up $3,000 food bills on a given weekend.

To its credit, Blackstone wisely withheld any bonus for its CEO so his interests would line up with those of shareholders. The board might want to align those interests a little harder; on Monday, the company announced it swung to a fourth-quarter loss of $170 million from a profit of $1.2 billion a year ago.

But the same day as Blackstone's earnings release, news emerged that Schwarzman had made a $100 million personal donation to revamp New York City's Central Library. Shareholders will be comforted to know that their investment will at least net them vastly improved book-borrowing privileges.

Dumb-o-meter score: 82. "Difficult market conditions in the U.S. and Europe continue in 2008 and there is little visibility on when these conditions might improve," Schwarzman said in the company's earnings statement. Schwarzman conditions, on the other hand, will likely remain just fine.

5. WellPoint Predictions Prove Offpoint

WellPointWLP looked neither well nor particularly on point when it slashed its 2008 forecast Tuesday, sending its shares down nearly 30% and infecting the rest of the sector with a case of investor jitters.

Sure, slashed guidance is a lot less fun than boosted guidance or an upside surprise. But it happens on Wall Street, particularly in the tenuous business of health insurance. Two things stand out about WellPoint's delivery of bad tidings, though.

First, the company fessed up that it had miscalculated its own medical cost ratio when pricing its insurance. Insurance companies have to know in advance what they're going to charge clients, so an itty-bitty increase in costs can kill an insurer's paper-thin margins. Add in a price war with sector rivals like UnitedHealth UNH and Humana HUM, and suddenly profits fall far below forecasts. WellPoint's simple math mistakes wound up costing shareholders millions. Oops.

That's bad, but to double down on dumbness, WellPoint had earlier convinced shareholders that it saw costs decreasing and profits rising. It's one thing to revise estimates, but it's another game entirely to promise a bull run only to lead investors off a cliff.

Rest assured, though, that WellPoint's prognosis is looking up. Says CEO Angela Braly, "While we are disappointed with having to revise our 2008 outlook, we are still expecting growth this year ... we are taking actions and making investments in our business to further improve our performance during the balance of this year and beyond."

Dumb-o-meter score: 79. "Actions" and "investments in our business." Sounds like a winning strategy from a company that knows what it's doing.