The Five Dumbest Things on Wall Street This Week - TheStreet

1. Savvy Negotiators

Bernie Ebbers'

conviction Tuesday left some people musing about his defense strategy. Jurors rejected the ex-

WorldCom

chief's so-called "aw shucks" act, in which he claimed ignorance of basic accounting concepts, and were apparently angered by Ebbers' refusal to accept responsibility.

But Ebbers lawyer Reid Weingarten wasn't the only one pursuing dubious legal strategies in the WorldCom case.

Consider

J.P. Morgan Chase

(JPM) - Get Report

. The New York banking giant on Wednesday became the last big Wall Street firm to

settle claims that it misled investors by failing to warn them that WorldCom was in bad shape when it sold a big bond issue in 2002.

Of course, the bank taking the biggest hit in the WorldCom case has been

Citigroup

(C) - Get Report

, which in addition to underwriting the questionable bonds also employed a famously conflicted WorldCom fan, analyst Jack Grubman. Citi settled last May for $2.65 billion.

At the time, Morgan was

offered a deal using the Citibank formula,

TheStreet.com's

Matt Goldstein reported. Had Morgan settled then, it would have been on the hook for around $1.4 billion.

Instead, Morgan held out. And like Weingarten's decision to put Ebbers on the stand, that gamble looked at least debatable -- until this week.

But then the tide turned. After the judge in the class-action case ruled Monday that Morgan could be on the hook for as much as $10 billion in damages, the bank felt compelled to settle.

"Given recent developments, we made a decision to settle rather than risk the uncertainty of a trial," said CEO William Harrison. "We can now put this litigation behind us and continue to focus on our goal of making J.P. Morgan Chase the best financial services company in the world."

Falling Scales
Ebbers saw nothing, and Morgan settles for more

Wednesday's final bill: $2 billion.

So let's get this straight. By leaving the litigation hanging for 10 months, J.P. Morgan earned the right to pay an additional $600 million?

Aw, shucks.

2. Regular Joe

With Ebbers looking at hard time in federal prison (arguably a contradiction in terms), it's easy to see where his defense isn't being adopted

en masse

.

For instance, Ebbers' bubble-era contemporary, ex-

Qwest

(Q)

CEO Joe Nacchio, was

sued this week by the

Securities and Exchange Commission

. The agency says he oversaw a $3 billion accounting fraud at the struggling Denver telco. The SEC says the shenanigans at Qwest under Nacchio's reign cost investors $89 billion in market losses.

But Joe Nacchio is no Bernie Ebbers, no sir. Where Ebbers was just an old basketball coach unschooled in the "technical" details of accounting, according to last month's testimony, Nacchio knew exactly what was going on. Indeed, in place of Ebbers' "I didn't know" defense is what the

Denver Post's

Al Lewis calls an "everybody knew" defense.

Why, as Nacchio lawyer Charles Stillman pointed out, practically everyone

but

Bernie Ebbers was aware of what they were doing at Qwest. Even the language Qwest workers used in cooking the books became part of the lore, as

previously explored in this space.

"Unfortunately, the SEC has ignored

Nacchio's good-faith reliance on Qwest's extensive governance and disclosure process, which involved significant participation and advice of many other responsible people, including the company's internal and outside legal and accounting professionals and the Qwest board of directors and audit committee," Stillman said Tuesday in a statement released in response to the SEC's civil suit. "As Mr. Nacchio has consistently stated, he did nothing wrong and did not instruct anyone else to do anything wrong during his tenure at Qwest, and he looks forward to being vindicated."

Of course he should. As Enron and other big blowups have shown beyond the shadow of a doubt, a roomful of accountants can't possibly be wrong.

3. The Sumner Wind

In addition to Ebbers' conviction and Nacchio's SEC fight, this week brought several other penthouse pratfalls. For one,

Disney

(DIS) - Get Report

finally found a successor for Michael Eisner, arranging to put Robert Iger in his place a year earlier than Eisner had planned. For another, Eliot Spitzer forced

AIG

(AIG) - Get Report

to scramble to find its own new chief, replacing longtime top cheese Hank Greenberg.

And then there was

Viacom's

(VIA) - Get Report

announcement this week that it was considering splitting into two companies. CEO Sumner Redstone emphasized the benefits of separating fast-growing MTV and related businesses from the cash-cow CBS and radio operations, in an appeal to Wall Street's appetite for growth.

It's hard to argue against making your case easier for investors to grasp. After all, Viacom stock has lagged behind even Disney's over the last five years -- a fact that big shareholder Redstone is no doubt all too familiar with. At the same time, though, it's hard to ignore that a split-up would also head off a succession crisis like the one that felled Eisner.

In fact, the 81-year-old Redstone -- burned just last year by Mel Karmazin's abrupt bailout and subsequent resurfacing at

Sirius

(SIRI) - Get Report

-- said so himself. "The transaction would further the logical and orderly succession process that we put in place and would allow Viacom and its shareholders to take full advantage of the skills and experience of our deep management," Redstone said, referring to co-presidents Les Moonves and Tom Freston. "The transaction should also enable us to retain the best people for each business and would provide incentives for the creation of shareholder value that are more closely tied to the businesses they run."

Of course, Redstone isn't letting go completely. No, far from it: He remains Viacom's biggest shareholder and has indicated he would take the chairman's post at both companies after the split-up, should it come to pass.

But after all these years, the split-up talk finally shows that even Sumner isn't eternal.

4. Serving an Ace

Insurers are obviously no stranger to paperwork. But with all this attention from regulators, the paper chase is starting to look like a blizzard.

Take last week's filing from Bermuda-based insurer

Ace

(ACE)

. Like many of its peers in the industry, Ace is under investigation by various government agencies. The company says it is conducting its own probe, is cooperating with regulators, and has fired two and suspended three workers accordingly.

Clearly, the insurance scandal is no small matter. Already Eliot Spitzer has forced Ace rivals AIG and

Marsh & McLennan

(MMC) - Get Report

to shed their CEOs. News breaks almost daily, challenging the casual observer to keep pace with events.

Lucky for us, in addition to defending its customers from all sorts of risks and generally standing for principles we all can believe in, Ace is keeping track of the scandal. At least as measured by its correspondence with various government types.

Unlike most of its peers, the company is keeping -- and sharing -- a running subpoena count.

As of Wednesday, the company confides in its annual report, Ace had received 43 "subpoenas, interrogatories, civil investigative demands and letters of inquiry in connection with the pending investigations of insurance industry practices." The requests came from "Attorneys General of Connecticut, the District of Columbia, Florida, Massachusetts, Minnesota, New York, Ohio, Pennsylvania, Texas, and West Virginia and Departments of Insurance or other regulatory authorities in California, Florida, Illinois, Maryland, Michigan, Minnesota, New York, North Carolina, Pennsylvania, and Texas."

The investigations may find what they will, but let no one say Ace failed to keep adequate records.

5. Underdrive

Times change, but the ride only seems to get rougher for

General Motors

(GM) - Get Report

.

This week the company served up its latest earnings disappointment, knocking $2.7 billion off its market capitalization in a single day. GM now expects to lose $1.50 a share for the first quarter, compared with its previous estimate of break-even or better. The carmaker slashed full-year earnings guidance as well, to $1 to $2 a share from the previous $4-$5 forecast.

GM also said that instead of generating $2 billion in cash this year, as previously forecast, it will burn $2 billion in cash.

Rocky Road
Potholes in GM's forecasts

The numbers are dreary enough. After all, it wasn't long ago that the company was forecasting earnings of $6-$6.50 a share for 2005. The company made $6.51 a share last year.

But GM's latest foray into flawed forecasting pales next to the

claims it made a few years ago when CEO Rick Wagoner's big overhaul was just getting under way. Back in early 2002, the company

forecast earnings of $10 a share by the middle of the decade.

"We are staying the course on our key product programs and, in fact, are planning to accelerate the introduction of some of our most important launches," Wagoner said Wednesday. "Great cars and trucks are the key to success in this business, and so remain our top priority."

That's commendable. GM might also consider placing a higher priority on making earnings forecasts that don't end up looking completely outlandish.

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