The Five Dumbest Things on Wall Street
1. The Audacity of Cox
Who says Wall Street's watchdog is a poodle?
Securities and Exchange Commission
Chairman Christopher Cox showed some bark this week when he told Sen. Chuck Grassley (R., Iowa) where he could put his request to disclose why the SEC abandoned a 2005 investigation into whether
Bear Stearns
( BSC) duped investors by improperly valuing complex debt securities.
Now that Bear is smoldering in the junkyard of Wall Street's ongoing credit crunch, Grassley has joined the rest of Planet Earth in wondering whether Cox should be showing a little more bite.
As
The Wall Street Journal
reported in December, an SEC branch office said it intended in 2005 to recommend that Bear be charged for improperly pricing about $63 million of mortgage securities it sold to a bank. Mysteriously, the charges never saw the light of day.
Two years later, Bear sparked the credit storm after two of its internal hedge funds piled high with complex debt securities unraveled while its CEO was incommunicado at a bridge tournament. In mid-March, the
Federal Reserve
had to rescue the firm from bankruptcy and oversee its fire sale to
JPMorgan Chase
(JPM) - Get Report
.
Given this unfortunate turn of events, Cox's decision to scrap the 2005 investigation into Bear's valuation practices is now raising eyebrows.
"High-profile enforcement cases could have sent a message to Bear Stearns and other Wall Street firms to attempt to more accurately price mortgage securities," said the
Journal
. "Such a message could have helped blunt the impact of the current crisis, which has led to investor uncertainty over how firms price these mortgage-related instruments."
This particular instance of relaxation at the SEC is no anomaly in Cox's tenure. As Grassley noted in a recent letter to the SEC's inspector general, a Senate inquiry into the commission's failed investigation of Pequot Capital Management found that senior SEC officials showed "extraordinary deference" in gathering testimony from
Morgan Stanley
(MS) - Get Report
CEO John Mack because of his "prominence."
The New York Times
recently reported that the SEC's budget is shrinking, and its staff numbers have been slashed. Moreover, its remaining lawyers complain that commissioners are overruling the findings of the commission's enforcement division and watering down fines.
Cox has refused Grassley's request for disclosure on grounds of confidentiality. He no doubt smells the makings of a partisan witch hunt being launched by his fellow Republican.
Of course, when the SEC was created by Congress in 1934, it was guaranteed to be a nonpartisan agency because no more than three of its five commissioners can belong to the same political party. Now, President Bush has enhanced this arrangement by keeping only three commissioners -- all Republicans -- at the helm in order to protect the agency's bipartisanship from terrorism.
Dumb-o-meter score: 95. Wall Street's watchdog is more of a cockapoo.
2. Jack Welch: GE's Old Yeller
General Electric's
(GE) - Get Report
whiz-kid CEO, Jeff Immelt, described himself at the company's annual shareholders' meeting on Wednesday as "a complete believer in our company and our strategy."
If you think that's a little creepy, consider the reaction to GE's first-quarter results on national television from Immelt's mentor, Jack Welch: "I'd be shocked beyond belief, and I'd get a gun out and shoot him if he doesn't make what he promised now."
Welch, who handpicked Immelt to succeed him, lost his cool and showed a flash of brutal honesty on
CNBC
when he said that Immelt has a credibility problem.
"Here's the screw-up," said Welch. "You made a promise that you'd deliver this, and you missed three weeks later."
After sounding a bullish note about GE's first quarter in mid-March, Immelt was caught with his pants down when he recently reported earnings from continuing operations of 44 cents a share for the period, down 8% from last year and well below expectations on Wall Street for 51 cents.
Perhaps most alarming, GE's commercial-financing unit, which had seemed to be weathering the credit storm, posted an operating profit that was down 20%. GE, the perennial manager of earnings and expectations, had given no indication that such a decline was in store, and it now says that this year's profit from the unit will be down 5% to 10%.
As soon as the publicists got their hands on Welch, the retired corporate chief whose book title --"Straight From The Gut" -- is now a personal creed for
Comedy Central's
Stephen Colbert, backpedaled from his comments. By then, however, everyone knew how he really felt.
The problem for Immelt and Welch is that both their fingerprints are all over the financial mess at GE, and credibility is not a new issue for the sprawling industrial conglomerate. When the credit crisis struck Wall Street last summer, GE shares were trading at about $40. That's right about where they were seven years earlier when Immelt was chosen to succeed Welch at the company's helm.
So, shareholders had already grown impatient, and many have been pounding the table for GE to sell off NBC Universal and other assets to free up its higher-growth businesses. Now, the shares are trading at just $32, and shareholders are getting downright furious.
So, Immelt is in trouble, but is Welch off the hook? This is a man who was recently trying to buy
The Boston Globe
of all things. Before that, his unseemly divorce proceedings revealed his "stealth" compensation. Unbeknownst to them, shareholders were paying Welch a retirement stipend of $734,000 ...
per month
. His other retirement benefits, valued at $2 million per year, included a New York apartment with daily flower deliveries and wine, along with unlimited use of the corporate jet.
So if you're mad at Immelt, consider his rival for the job, Bob Nardelli, who was ousted from
Home Depot
(HD) - Get Report
after shareholders discovered that he gleaned $245 million over his five years with the company while the stock dropped 12%. He now works for Cerberus Capital Management, running Chrysler into the ground, so remember, it could be a lot worse.
Dumb-o-meter score: 91. If anyone happens to notice a tearful Welch escorting Immelt out behind a barn somewhere, please notify the proper authorities immediately.
3. Nat City Adds Insult to Injury
Investors who are concerned about the massive share dilution at
National City
( NCC) should lighten up and take a stroll down penny lane.
Never mind that the nation's 10th-largest bank agreed to sell an additional $1.4 billion in shares of the company at $5 a share -- a 40% discount to where the stock closed last week. Before then, the Ohio-based financial institution, which ranked among the 10 biggest originators of loans to people with poor credit histories in 2006, had just 600 million shares outstanding before the capital raising.
Sure, the stock dropped 28% in response to the news, having shed 82% of its value since the beginning of last year. But in a display of those old-fashioned Midwestern values, Nat City showed shareholders how much it cares by agreeing to pay them a quarterly dividend of a penny a share.
True, the production of pennies has become a waste to the U.S. taxpayer, and a penny-a-share dividend is a net loss to Nat City shareholders, given the costs of doing the paperwork. And yes, the bank previously paid a quarterly dividend of 21 cents a share and last year was paying 41 cents a share.
But like credit histories, these are nitpicky details. It's the thought that counts.
"We are pleased with the confidence that our investors have expressed in the value underlying National City's franchise and the fundamental strengths of our business model that will help drive a return to profitability," said Nat City CEO Peter Raskind.
We'd hate to see what an expression of no confidence would be for Raskind.
Dumb-o-meter score: 85. If things get worse, Nat City might even have to scrap its dividend, but right now, that would only be insulting to the intelligence of its loyal shareholders.
4. A Royal Bank's Pain
In raising fresh capital, Nat City was only taking a page from the playbook of the big boys.
Citigroup
(C) - Get Report
,
UBS
(UBS) - Get Report
,
Merrill Lynch
( MER),
Wachovia
(WB) - Get Report
and
Washington Mutual
(WM) - Get Report
all have taken similar steps.
Across the pond,
Royal Bank of Scotland
(RBS) - Get Report
announced the biggest stock sale in British corporate history this week, asking shareholders for $23.9 billion after revealing hefty new losses from exposure to bad U.S. mortgages.
Oh, and RBS is also hurting for capital because it chose to acquire
ABN Amro
of the Netherlands last year with a consortium of investors for $101 billion -- the largest banking takeover ever.
That little nugget won't be far from the minds of shareholders when RBS seeks its approval for the rights issue next month during its annual meeting. Current holders will be offered 11 new shares for every 18 existing shares at $3.98 each.
"You could call it unfortunate" that the ABN Amro deal was done "at a time when bank valuations were much higher than they are now," said RBS Chairman Tom McKillop.
Dumb-o-meter score: 79. You could call it a few other things too.
5. Gray Lady vs. Foxy Lady
An exhaustive investigation in last Sunday's edition of
New York Times Co.'s
(NYT) - Get Report
flagship newspaper lit up the Internet this week.
Audiences were puzzled to learn how many of the former military leaders that now appear everywhere on the airwaves to give their analysis on matters of national security and war to an anxious public had failed to disclose a pesky little detail. These "military analysts" often have recited "talking points" issued by the government on the air at a time when they also were busy shilling for access to the White House and the Pentagon on behalf of military contractors as lobbyists, senior executives, board members or consultants.
Despite the online demand for hard-hitting news stories like this, newspaper publishers are having a hard time translating such work into profits in the digital age. With its stock having lost about two-thirds of its value over the last four years, investors and readers alike are concerned that
The New York Times
and other major newspapers won't have the resources for such investigations in the future.
Fortunately for Wall Street, however, the U.S. financial markets' finest source for original, quality information --
The Wall Street Journal
-- is now in the hands of a man who can be counted on to fill the void:
News Corp.
(NWS) - Get Report
CEO Rupert Murdoch.
While News Corp.'s
Fox News
was the most frequent offender in
The Times'
investigation, where "usual dividing lines between government and journalism have been obliterated," no one doubts that Murdoch will order his minions to pull no punches in their quixotic quest for the truth.
Just four months into News Corp.'s ownership of
The Journal
, Murdoch is already following through on his promises to the newspaper's previous owners to shake things up. This week, he canned
The Journal's
managing editor, Marcus Brauchli, who was viewed as the last remaining link between the old
Journal
and the new.
The separation was reportedly amicable, as Brauchli recently hired a high-powered Washington lawyer to negotiate his departure, according to
The Journal
. Brauchli will stay on the News Corp. payroll as a consultant, providing "guidance to senior management in a wide range of areas," the newspaper reported.
Last June, Brauchli told staffers at the newspaper that he would resign if he disagreed with any of News Corp.'s marching orders, but this week he assured the company that his departure had nothing to do with disagreements over editorial standards.
"Now that the ownership transition has taken place, I have come to believe the new owners should have a managing editor of their choosing," Brauchli said in a note to staff.
Murdoch is expected to beef up the nonfinancial coverage at the paper and eventually use its prestige to boost its already wildly successful
Fox Business News
channel, launched recently to compete with
CNBC
. So don't worry about the housing bubble or the
Nasdaq
bubble --
or
the "Lost Decade" for stocks that came in between. The future is looking increasingly foxy.
Dumb-o-meter score: 68."Here I come, baby. I'm coming to getcha!"