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The Five Dumbest Things on Wall Street This Week

Spaced out at Guidant; Exxon reality check; Kodak calculator; GM's wheels aspin; Sovereign's debt.
Author:

Guidant's Gall
Not for faint of heart

1. Overload

Looks like

Guidant

(GDT)

blew a fuse this week.

The maker of devices for treating heart ailments sued Johnson & Johnson (JNJ) - Get Johnson & Johnson (JNJ) Report Monday in a bid to resuscitate their fallen merger. J&J says it isn't obliged to close the $25 billion deal because ballooning legal and regulatory problems have dimmed Guidant's long-term outlook.

In a suit filed in U.S. District Court in the Southern District of New York, Indianapolis-based Guidant demands " specific performance" of the Dec. 15, 2004, agreement. The lawsuit builds on a case Guidant has been making with Wall Street ever since The New York Times reported that Guidant waited as long as three years to warn doctors that its Prizm 2 DR defibrillator had repeatedly short-circuited.

"We believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth," Guidant chief Ronald W. Dollens said last week.

Guidant's growth prospects were certainly on display in Monday's third-quarter earnings, which showed a 47% drop in adjusted earnings on a 14% sales decline. Worldwide implantable defibrillator sales slid 26% from a year ago, Guidant said. Implantable defibrillator sales in the U.S. dropped 31%, international implantable defibrillator sales 3%, worldwide pacemaker sales 15% and worldwide coronary stent sales 8%.

Even allowing for gains in its U.S. stent, worldwide angioplasty and so-called emerging businesses, that's quite a growth story. Guidant then topped that boffo bottom-line showing by promising to publish more data on how its products perform.

"We understand that patients, physicians and others are requesting additional information related to product performance," said Fred McCoy, president, Cardiac Rhythm Management. "Our updated CRM Product Performance Report delivers an unprecedented level of relevant product performance information in a single, readily-accessible report."

That's certainly comforting, given Guidant's performance in the Prizm case. Also reassuring: Guidant's decision to

name a blue-ribbon panel to "point the way towards industry-leading practices in the design and manufacture of life-saving medical devices."

The panel's main qualification? "All three team members recently served as system safety experts examining the NASA space shuttle program, and will bring unique capabilities gained from this effort to the Guidant design for reliability project," Guidant said.

Sure. When it comes to accountability, there's no better role model than NASA.

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Dumb-o-Meter score: 90. Indianapolis, we have a problem.

Windfalls and Windbags
Oil CEOs in Capitol pressure-cooker

2. Reality Bites

You can always count on Congress to produce a gusher of common sense, but apparently

Exxon Mobil

(XOM) - Get Exxon Mobil Corporation Report

chief Lee Raymond wants to dig even deeper.

The Senate's Energy and Commerce committees met this week to hear out the big oil companies on just why gasoline prices are high. In addition to questioning Raymond, the panel queried execs at ConocoPhillips (COP) - Get ConocoPhillips Report, ChevronTexaco (CVX) - Get Chevron Corporation Report, BP (BP) - Get BP p.l.c. Sponsored ADR Report and Shell (RDSA) .

As usual, the scene was set for a calm exchange of ideas. Sen. Barbara Boxer (D., Calif.) put up a chart comparing the CEOs' salaries and bonuses with the federal minimum wage. "Your sacrifice appears to be nothing," she thundered. When the chief of the Federal Trade Commission defended the role of higher prices in tempering oil shortages, Sen. Ron Wyden (D., Ore.) responded, "That's an astounding theory of consumer protection,"

The Associated Press

reports.

The oil execs presented a more or less united front, urging lawmakers to let market forces work. "As an industry we feel it is not a good precedent to fund a government program," Conoco Chairman James Mulva said in response to calls for industry funding of low-income customers' heating bills. "We respectfully request that Congress do no harm by distorting markets or seeking punitive taxes on an industry working hard to respond to high prices and supply shortfalls," said Shell's John Hofmeister.

But perhaps the most cogent commentary came in an Exxon press release summarizing Raymond's remarks. "Addressing the committees as part of a joint hearing on energy pricing and profits, Raymond noted that the key to a successful energy future needs to be grounded in reality, focused on the long-term and intent on finding viable solutions."

Congress? Grounded in reality? Good luck, Lee.

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Dumb-o-Meter score: 88. "The oil companies owe the American people an explanation," said Sen. Pete Domenici (R, N.M.). OK, here it is: Too much demand and not enough supply. Next subject.

Who Said Pictures Don't Lie?
Kodak's books exposed

3. Airbrush

Restructuring is hard. Just ask

Kodak

(EK)

.

The Rochester, N.Y., picture company has spent recent years struggling to shift its focus to digital photos from film. In the course of this so-called transformation, Kodak has cut jobs by the thousands while running increasingly steep quarterly losses. The company's poor performance cost former chief Dan Carp his job this spring and has sent the stock down 31% for 2005.

That sounds plenty bad, but this week it got worse. Kodak said this year's financials, featuring a bottom-line loss of $1.3 billion through nine months, weren't just pathetic. They were wrong, too.

Kodak said Wednesday that it had found accounting errors involving restructuring accruals associated with severance and special pension-related termination benefits. The errors, totaling $15 million after taxes, had Kodak recognizing costs in the wrong periods within 2005. Finance chief Robert Brust said the problem points to a material weakness in internal controls and pledged to fix it by year-end.

Of course, Kodak wouldn't be Kodak if it didn't try to put the problem in the best possible light. It said the error involved one incorrect calculation of a severance accrual for one employee -- "the only such error out of approximately 6,000 employee reductions made this year," Kodak trumpeted.

And it's not like firing people is easy, Kodak hastily added. Not for the workers who lose their jobs, not for the bosses who hand out those nasty pink slips -- and certainly not for the overworked accountants who have to count up all those beans.

"While we are deeply committed to the highest standards of accounting, the act of reducing employment by more than 15,000 people thus far, in more than 40 countries, and dealing with a variety of labor laws and severance plans, creates the opportunity for errors in the numerous entries that must be made," said Brust. "We continue to improve our financial controls, and the detection of these errors is evidence of the effectiveness of this effort."

The errors may be evidence of something, but Kodak's effectiveness isn't it.

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Dumb-o-Meter score: 85. Want even more good news? "There were too many zeros added to the employee's accrued severance," a Kodak flack says. But "there was never a payment." Good to know.

To view Colin Barr's humorous video take on Kodak's material weakness, click here

.

Misery in Motown
Restatement GM's latest headache

4. Little Red Wagoner

Kodak wasn't the only outfit plunging to new depths this week.

GM

(GM) - Get General Motors Company (GM) Report

shares hit a 23-year low after the company rolled out its own restatement plans.

GM, which already was under Securities and Exchange Commission scrutiny for its bookkeeping, said late Wednesday that it would have to restate 2001 earnings to fix an error in how it booked credits from suppliers. The mistakes resulted in the struggling Detroit company overstating 2001 earnings from continuing operations by some $350 million, or 30%.

The 2001 restatement is the latest black eye for CEO Rick Wagoner. GM's debt has been cut to junk status, and its health care costs and pension obligations have soared. Earnings have collapsed as foreign manufacturers gobble up market share. The company's reliance on gas-guzzling trucks and SUVs is hurting it as gas prices soar.

Banc of America Securities analyst Ron Tadross, citing "increasing evidence that hidden liabilities exceed hidden assets," projected that there's a 40% chance GM will file for bankruptcy in the next two years.

In addition to hammering GM shareholders, the march of bad news has painted a particularly unflattering portrait of Wagoner. It was only 3 1/2 years ago, after all, that he boosted the company's stock by

boldly calling for per-share earnings of $10. Of course, that call doesn't look too good now, what with GM having lost $3 billion so far this year.

Oh well. Maybe he can just restate his prediction.

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Dumb-o-Meter score: 82. Judging by recent announcements from Calpine (CPN) , AIG (AIG) - Get American International Group, Inc. Report, Fannie Maeundefined and Freddie Macundefined, maybe November is Erroneous Accounting Month.

5. Brotherly Love

The last month has changed the banking landscape forever.

That's one takeaway from the snipefest between San Diego asset manager Relational Investors and

Sovereign Bank

(SOV)

. The two have been issuing dueling press releases ever since Sovereign last month agreed to sell a $2.4 billion stake to Spain's

Grupo Santander

(STD)

and buy New York-based

Independence Community Bank

(ICBC)

for $3.6 billion.

Relational Investors is Sovereign's largest shareholder, with a 7.9% stake. In May, Relational said it had taken the position in Sovereign in a bid to change management and reform the bank's "poor corporate governance structure."

That talk only grew louder with the Santander agreement, which Relational charges entrenches top management at the expense of shareholders. The deal doesn't require shareholder approval, because the Spanish bank is acquiring a 19.8% equity stake, just shy of the 20% threshold that would have triggered a vote. The

New York Stock Exchange

is considering a Relational request to

block the sale.

For its part, Sovereign shrugs off the criticisms. "Our pending transactions were thoroughly reviewed by the advisors to Sovereign, Santander and Independence, and we are confident that both transactions are in accordance with all applicable laws and regulatory requirements," the bank said this week after Relational held a

Sovereign shareholder meeting in an effort to rally its cause. "Nothing that we have heard from Relational today changes that view."

That hasn't quieted Relational. In a full-page newspaper ad Thursday, the firm criticizes Sovereign's dealings with its directors and its disclosure of those relationships. Relational notes, for instance, that lead director Daniel Rothermel owns a

lawn service used by Sovereign -- a fact it charges wasn't clearly disclosed by Sovereign.

As usual, the bank begs to differ. "The company also reported that its corporate governance is better than 98% of banks listed in the

S&P 500

index," Sovereign said recently. "Also, it has recently taken steps on its own to restructure its director compensation program. It also has no preferential loans, and has no preferential business relationships with any of its non-management directors."

Well, maybe the grass is just greener in Philadelphia.

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Dumb-o-Meter score: 73. Both sides earn high marks in obscurity. "Relational Investors does not believe that the source of strength doctrine applies to Sovereign," the firm screamed in one press release this week. Keep us posted.

In our ongoing effort to enrich the reader experience, the Five Dumbest Things Lab now scores each item using our proprietary Dumb-o-Meter. This cutting-edge technology employs a finely calibrated, 100-point scale measuring sheer Dumbness, as calculated via a closely guarded secret formula.

Got your own idea for the dumbest thing of the week?

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